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TABLE OF CONTENTS
PART IV

Table of Contents

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10K

(Mark One)    
ý   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended January 31, 2015

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 number 1-3381

The Pep Boys—Manny, Moe & Jack
(Exact name of registrant as specified in its charter)

Pennsylvania
(State or other jurisdiction of
incorporation or organization)
  23-0962915
(I.R.S. employer
identification no.)

3111 West Allegheny Avenue,

 

 
Philadelphia, PA
(Address of principal executive office)
  19132
(Zip code)

215-430-9000
(Registrant's telephone number, including area code)

         Securities registered pursuant to Section 12(b) of the Act:

Title of each class   Name of each exchange on which registered
Common Stock, $1.00 par value   New York Stock Exchange

         Securities registered pursuant to Section 12(g) of the Act: None

         Indicate by check mark whether the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o    No ý

         Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o    No ý

         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 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 ý    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 ý    No o

         Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý

         Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o   Accelerated filer ý   Non-accelerated filer o
(Do not check if a
smaller reporting company)
  Smaller reporting company o

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

         As of the close of business on August 2, 2014 the aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $533,440,000.

         As of April 4, 2015, there were 53,781,268 shares of the registrant's common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

         Portions of the registrant's definitive Proxy Statement to be delivered to shareholders in connection with the Annual Meeting of Shareholders to be held June 15, 2015 are incorporated by reference into Part III of this Annual Report.

   


Table of Contents


TABLE OF CONTENTS

 
   
  Page  

PART I

 

 

       

Item 1.

 

Business

    1  

Item 1A.

 

Risk Factors

    10  

Item 1B.

 

Unresolved Staff Comments

    15  

Item 2.

 

Properties

    15  

Item 3.

 

Legal Proceedings

    15  

Item 4.

 

Mine Safety Disclosures

    15  

PART II

 

 

   
 
 

Item 5.

 

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

    16  

Item 6.

 

Selected Financial Data

    18  

Item 7.

 

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

    19  

Item 7A.

 

Quantitative and Qualitative Disclosures About Market Risk

    33  

Item 8.

 

Financial Statements and Supplementary Data

    35  

Item 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

    69  

Item 9A.

 

Controls and Procedures

    69  

Item 9B.

 

Other Information

    72  

PART III

 

 

   
 
 

Item 10.

 

Directors, Executive Officers and Corporate Governance

    72  

Item 11.

 

Executive Compensation

    72  

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

    72  

Item 13.

 

Certain Relationships and Related Transactions and Director Independence

    72  

Item 14.

 

Principal Accounting Fees and Services

    72  

PART IV

 

 

   
 
 

Item 15.

 

Exhibits and Financial Statement Schedules

    73  

 

Signatures

    76  

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PART I

ITEM 1    BUSINESS

GENERAL

        The Pep Boys—Manny, Moe & Jack (and subsidiaries, the "Company") has been the best place to shop and care for your car since it began operations in 1921. Approximately 19,000 associates are focused on delivering the best customer service in the automotive aftermarket industry across 806 locations located throughout the United States and Puerto Rico. Pep Boys satisfies all of a customer's automotive needs through our unique offering of service, tires, parts and accessories.

        Our stores are organized into a hub and spoke network consisting of Supercenters and Service & Tire Centers. Supercenters average approximately 20,000 square feet (our new Supercenter format is approximately 14,000 square feet) and combine do-it-for-me service labor, installed merchandise and tire offerings ("DIFM") with do-it-yourself parts and accessories ("DIY"). Most of our Supercenters also have a commercial sales program that provides prompt delivery of parts, tires and equipment to automotive repair shops and dealers. Service & Tire Centers, which average approximately 6,000 square feet, provide DIFM services in neighborhood locations that are conveniently located where our customers live or work. Service & Tire Centers are designed to capture market share and leverage our existing Supercenters and support infrastructure. We also operate a handful of legacy DIY only Pep Express stores.

        The following table sets forth the percentage of total revenues from continuing operations contributed by each class of similar products or services for the Company and should be read in conjunction with the Consolidated Financial Statements and Notes thereto included elsewhere herein:

 
  Year ended  
 
  January 31,
2015
  February 1,
2014
  February 2,
2013
 

Parts and accessories

    58.4 %   59.9 %   59.9 %

Tires

    18.1     17.9     18.7  

Total merchandise sales

    76.5     77.8     78.6  

Service labor

    23.5     22.2     21.4  

Total revenues

    100.0 %   100.0 %   100.0 %

        In fiscal 2014, we opened 19 new Service & Tire Centers and two new Supercenters and converted one Supercenter into a Service & Tire Center. We also closed eight Service & Tire Centers and six Supercenters. As of January 31, 2015, we operated 563 Supercenters, 237 Service & Tire Centers and six Pep Express stores. These locations consist of approximately 12,940,000 gross square feet of retail space, including over 7,500 service bays.

        The following table indicates, by state, the number of stores the Company had in operation at the end of each of the last four fiscal years, and the number of stores opened and closed by the Company during each of the last three fiscal years:

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NUMBER OF STORES AT END OF FISCAL YEARS 2011 THROUGH 2014

State
  2014
Year End
  Opened   Closed   2013
Year End
  Opened   Closed   2012
Year End
  Opened   Closed   2011
Year End
 

Alabama

    39     1     1     39     1         38     1         37  

Arizona

    20             20         2     22             22  

Arkansas

    1             1             1             1  

California

    147         2     149     18         131     1         130  

Colorado

    7             7             7             7  

Connecticut

    7             7             7             7  

Delaware

    9             9             9     1         8  

Florida

    102     5     1     98     7         91     5     4     90  

Georgia

    49     4     2     47     1     3     49     3     1     47  

Illinois

    38     1     1     38     3         35     3         32  

Indiana

    7             7             7             7  

Kentucky

    3         1     4             4             4  

Louisiana

    8             8             8             8  

Maine

    1             1             1             1  

Maryland

    20             20             20             20  

Massachusetts

    6         1     7             7             7  

Michigan

    5             5             5             5  

Minnesota

    3             3             3             3  

Missouri

    1             1             1             1  

Nevada

    12             12             12             12  

New Hampshire

    4             4             4             4  

New Jersey

    43             43     4     1     40     4         36  

New Mexico

    8             8             8             8  

New York

    40     3     2     39     2         37     4         33  

North Carolina

    15     5         10     2         8             8  

Ohio

    12             12             12             12  

Oklahoma

    5             5             5             5  

Pennsylvania

    62     4     2     60     5         55     2         53  

Puerto Rico

    27             27             27             27  

Rhode Island

    2             2             2             2  

South Carolina

    6             6             6             6  

Tennessee

    7             7             7     1     1     7  

Texas

    58         3     61     4         57     1         56  

Utah

    6             6             6             6  

Virginia

    17             17             17             17  

Washington

    9             9             9             9  

Total

    806     23     16     799     47     6     758     26     6     738  

        We are targeting a total of 15 new Service & Tire Centers and one new Supercenter in fiscal 2015, all of which will be in our new "Road Ahead" format detailed below. We expect to lease new locations, as we believe that there are sufficient existing available locations, including build to suit locations, in the marketplace with attractive lease terms to enable our expansion.

INDUSTRY OVERVIEW

        The automotive aftermarket industry is in the mature stage of its life cycle and while the DIY space is dominated by a small number of companies with large market shares, the DIFM or automotive

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service business is highly fragmented. Over the past decade, consumers have moved away from DIY toward DIFM due to increasing vehicle complexity and electronic content, as well as decreasing availability of diagnostic equipment and know-how. In addition, while this needs-based industry has a dedicated DIY customer base, the number of consumers that would prefer to have a professional fix their vehicle fluctuates with economic cycles. For example, a drop in disposable income during the recession forced some former DIFM consumers to work on their own vehicles, resulting in short-term growth in the DIY market. During this period, weak labor and credit markets depressed new vehicles sales, thereby increasing the average length of vehicle ownership. This increase in the average age of vehicles on the road also aided the short-term growth of the DIY industry as owners of older vehicles were more likely to work on their own vehicles. However, as the economy continues to gain momentum and as disposable income continues to rise, consumers may become more confident and invest in new vehicles, and once again shift away from DIY toward DIFM and will do so at increasing rates. Consistent with this long-term trend, we have adopted a long-term strategy of growing our automotive service business, while maintaining our DIY customer base by offering the newest and broadest product assortment in the automotive aftermarket.

BUSINESS STRATEGY

        All of our efforts are focused on ensuring that Pep Boys is the best place to shop and care for your car. The legacy of our founders—Manny, Moe & Jack—has inspired us since 1921 to deliver passionate customer service. We are people taking care of people ... and their cars. More than just words, we continue to learn more from our growing set of customer data and to advance our customer centered business model. We are focused on our target customer segments and the delivery of world-class customer service. The following strategies have been developed and prioritized to support our vision and, in turn, our ultimate goal as a public company of maximizing shareholder value.

        Attract, develop and retain the best people.    We need the best people to care for our customers and their cars. This process begins with their recruitment and continues throughout their tenure as Pep Boys associates. We are constantly reviewing and improving our hiring process to include updated core competency and positional profiles and pre-hire assessment screening. Once hired, a Pep Boys associate has the opportunity to participate in a variety of classroom, online skills and leadership training to develop a career path with us. All associates are also encouraged to complete tests resulting in certifications by the National Institute for Automotive Service Excellence ("ASE"), which is broadly recognized for training certification in the automotive industry. We also offer performance-based compensation programs designed to reward the delivery of the passionate customer service that is the centerpiece of our vision. Improving the overall quality of our people has allowed us to eliminate one layer of our field management team and to increase the spans of control of our area directors resulting in payroll savings.

        Grow where our target customers live, work and shop.    We achieve this through both our physical locations and online presence. We have researched and developed proprietary customer segment targets that we believe allow us to maximize our profitability. Our store growth, and any rationalization of our store base, is designed to optimize the proximity of these locations to our target customers. Similarly, our omni-channel digital strategy, which we call e-SERVE, is developed around making it easier for our target customers to do business with us. pepboys.com (including our mobile device version) allows our customers to learn about the breadth and depth of our service and product offerings, price and schedule service appointments and purchase an ever-expanding assortment of products (including the addition, in 2014, of merchandise shipped directly from our vendors) for in store or home delivery. We have also partnered with third party on line marketplaces where customers can buy product and make service appointments at our locations. As a whole, our digital business represented 6% of sales in the fourth quarter of fiscal 2014 and grew by 43% on a year over year basis.

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        Deliver customer experiences that are "beyond expectations".    We strive to be friendly, do it right, show compassion and keep promises with each and every customer. We have developed a new training program designed to teach our associates how to enhance the customer experience through building relationships with our customers. Before addressing a customer's immediate need, our associates are taught to build rapport with the customer that will not only lead to customer satisfaction with the current transaction, but ultimately to the customer choosing Pep Boys for all of their automotive needs in the future. We also continue to review, revise and prioritize our store-level tasks and key performance indicator reporting to ensure that our associates are focused on serving our customers and to maximize our payroll spend. Information gathered through our rewards program, customer surveys and focus groups helps us to understand the customer experience that our target customer segments expect and the services and products that will best meet their needs and desires.

        Provide the best assortment and shopping experience in the automotive aftermarket.    We begin by being a full service—tire, maintenance and repair—shop. Our full service capabilities, ASE certified technicians and continuous investment in training and equipment allow customers to rely on us for all of their automotive maintenance and repair needs—from replacing the oil in their engine to replacing the engine itself. By offering a broad assortment of branded and private label products, we enjoy a competitive advantage over many of our DIFM competitors.

        The size of our Supercenters allows us to provide the highest level of replacement parts and tire coverage and the broadest range of maintenance, performance and appearance products and accessories in the industry. We are able to leverage our Superhub and Tire hub stores, which have a larger assortment of product than our normal Supercenter, to satisfy customer needs for slow-moving product or offering an expanded assortment of tires for same day delivery to requesting Supercenters on demand. This broad product assortment coupled with our tire and equipment offerings also differentiates us from the competition to our commercial customers. We are also expanding our Speed Shops (153 as of the end of fiscal 2014), a store-in-a-store within existing Supercenters that creates a differentiated retail experience for automotive enthusiasts by stocking high-performance and specialty products. We are similarly focused on price optimization and inventory rationalization opportunities.

        We continue to experiment with our new market concept that we call the "Road Ahead." Designed around the shopping habits of our target customer segments, this concept enhances the entire store—our people, the product assortment, its exterior and interior look and feel and the marketing programs—to learn how we can be successful in attracting more of these target customers and earn a greater share of their annual spend in the automotive aftermarket. Our Road Ahead strategy also allows us to use our retail business to drive the service business with free professional battery and wiper installations. To date, we have converted 28 Supercenters in five markets and opened two new Supercenters in the Road Ahead format. We have also opened 56 new Service & Tire Centers in this format. As a result, approximately 12% of our store base now operated in the new Road Ahead format as of January 31, 2015. In 2015, we plan on converting up to an additional 25 Supercenters, which will test a significantly reduced per store investment.

        Tell our story internally and externally.    It is essential to our success that our associates and consumers understand our vision and brand position. Accordingly, our marketing combines promotional messages with customer service oriented brand positioning. These messages are conveyed to our associates through corporate communications and leadership training, while tailored marketing plans including TV and radio promotions, digital media, direct marketing, grass-roots and print campaigns deliver the message to our target customer segments.

STORE IMPROVEMENTS

        In fiscal 2014, our capital expenditures totaled approximately $67.3 million which included the addition of 21 new locations, the conversion of 28 Supercenters to the Road Ahead format, the

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addition of 47 Speed Shops within existing Supercenters and required expenditures for existing stores, offices and distribution centers. Our fiscal 2015 capital expenditures are expected to be approximately $60.0 million, which includes the planned addition of 15 Service & Tire Centers, one Supercenter, and the conversion of up to 25 stores to the new "Road Ahead" format. These expenditures are expected to be funded from cash on hand and net cash generated from operating activities. Additional capacity, if needed, exists under our revolving credit facility.

SERVICES AND PRODUCTS

        As of January 31, 2015, we operated a total of 7,524 service bays in 800 of our 806 locations. Each service location performs a full range of automotive maintenance and repair services (except body work) and installs tires, parts and accessories.

        Each Pep Boys Supercenter carries a similar product line, with variations based on the number and type of cars in the market where the store is located. A Pep Boys Service & Tire Center carries tires and a limited selection of our products. A full complement of inventory at a typical Supercenter includes an average of approximately 28,000 items, while Service & Tire Centers average approximately 2,000 items. Our product lines include: tires; batteries; new and remanufactured parts for domestic and import vehicles; chemicals and maintenance items; fashion, electronic, and performance accessories; and select non-automotive merchandise that appeals to our target customer segments.

        In addition to offering a wide variety of high quality name brand products, we sell an array of high quality products under various private label names. We sell tires under the names DEFINITY, FUTURA® and CORNELL®, and batteries under the name PROSTART®. We also sell wheel covers under the name FUTURA®; air filters, anti-freeze, chemicals, cv axles, hub assemblies, lubricants, oil, oil filters, oil treatments, transmission fluids, custom wheels and wiper blades under the name PROLINE®; alternators, battery booster packs, alkaline type batteries and starters under the name PROSTART®; power steering hoses, chassis parts and power steering pumps under the name PROSTEER®; brakes under the name PROSTOP® and brakes, batteries, starters, ignitions and chassis under the name VALUEGRADE. All products sold by the Company under various private label names were approximately 25% of our merchandise sales in fiscal 2014, 20% in 2013, and 24% in 2012.

        Our commercial automotive parts delivery program, branded PEP EXPRESS PARTS®, is designed to increase our market share with the professional installer and to leverage our inventory investment. The program satisfies the commercial customer's automotive inventory needs by taking advantage of the breadth and quality of Pep Boys' parts and tires inventory as well as its experience supplying its own service bays and mechanics. As of January 31, 2015, approximately 80%, or 456, of our 569 Supercenters and Pep Express stores provided commercial parts delivery.

        We have a point-of-sale system in all of our stores, which gathers sales and inventory data by stock-keeping unit from each store on a daily basis. This information is then used to formulate pricing, inventory, marketing and merchandising strategies. We have an electronic parts catalog that allows our associates to efficiently look up the parts that our customers need and to provide complete job solutions, advice and information for customers' vehicles. We have an electronic work order system in all service centers. This system creates a service history for each vehicle, provides customers with a comprehensive sales document and enables us to maintain a service customer database.

        We use a competitive pricing strategy, setting prices based on market forces and then complementing them with promotions. We believe that targeted advertising and promotions play important roles in succeeding in today's environment. We are constantly working to understand our target customer segments' needs and desires so that we can deliver outstanding customer service and build long-lasting, loyal relationships with them. We utilize advertising, promotions and a loyalty card program (Rewards) to convey our commitment to customer service and to promote our service and repair capabilities and product offerings. We are committed to an effective multi-media promotional

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schedule supplemented by extensive direct marketing, grass-roots campaigns and occasional print campaigns. Finally, we utilize in-store signage and creative product placement to help educate customers about services and products that fit their needs.

        Through our desktop and mobile website at www.pepboys.com, we strive to empower customers to make informed product and service purchase decisions for their automotive projects and vehicle maintenance needs. We focus on providing high-quality product and service information, online buying guides and how-to advice, customer product ratings and reviews, product videos and clear repair service details in a convenient 24/7 online experience. Through our website, customers can learn more about the Pep Boys brand and our products and services, purchase and schedule installation of tires with our TreadSmart application, schedule automotive maintenance and repair services with our e-SERVE application, keep track of maintenance and service records through our online Glovebox application, and purchase automotive parts and accessories through several delivery methods, including buying online and shipping to home or picking up in store, as well as the convenience to reserve items online and pay in store.

        This year we have continued to improve the stability of our online infrastructure through a platform migration upgrade and continued vigilance of Payment Card Industry (PCI) standards and compliance to ensure our overall security and customer privacy. We maintain a dedicated online customer service team who provides direct support, including answering any order, product or service questions, assistance in ordering and basic technical support to customers who contact them via phone, live chat, email or webform. We are committed to the continued improvement of our online presence with a focus on providing a seamless omni-channel customer experience that builds trust and enriches the personal connection between our customers and our brand.

STORE OPERATIONS AND MANAGEMENT

        Most Pep Boys stores are open seven days a week. Our Supercenters either have a General Manager or a Retail Manager and Service Manager (Service & Tire Centers only have a Service Manager) who report to geographic-specific Area Directors. The Area Directors report to a Regional Vice President who reports to the Senior Vice President of Store Operations, who, in turn, reports to the Chief Executive Officer. As of January 31, 2015, the average length of service with Pep Boys for a General Manager, a Retail Manager and a Service Manager is approximately 8.9, 11.4 and 7.3 years, respectively.

        Supervision and control over individual stores is facilitated by Area Directors and Regional Vice Presidents who make regular visits to stores and utilize the Company's computer system and operational handbooks. All of our advertising, accounting, purchasing, information technology and most administrative functions are conducted at our corporate headquarters in Philadelphia, Pennsylvania. Certain administrative functions for our regional operations are performed at various regional offices. See "Item 2 Properties."

INVENTORY CONTROL AND DISTRIBUTION

        Most of our merchandise is distributed to our stores from our warehouses by dedicated and contract carriers. Target levels of inventory for products are established for each warehouse and store based upon prior shipment history, sales trends and seasonal demand. Inventory on hand is compared to target levels on a weekly basis at each warehouse, potentially triggering re-ordering of merchandise from suppliers. In addition, each Pep Boys store has an automated inventory replenishment system that orders additional inventory, generally from a warehouse, when a store's inventory on-hand falls below the target level. We also consolidate certain slow-moving hard parts inventory into our centrally-located Indianapolis warehouse that can service each of our stores with overnight delivery of these parts when necessary.

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        Implementation of the Superhub concept enables local expansion of our auto parts product assortment in a cost effective manner. We are now able to satisfy customer needs for slow-moving auto parts by carrying limited amounts of this product at Superhub locations. These Superhubs are generally replenished from distribution centers multiple times per week. As of January 31, 2015, we operated 58 Superhubs within existing Supercenters. These Superhubs will provide approximately 475 of our stores with an expanded auto parts assortment. We also maintain one free standing tire warehouse in the Philadelphia market and seven tire hubs within existing Supercenters in other markets that offer an expanded assortment of tires for same day delivery to our stores in order to satisfy customer demand directly rather than from tire distributors.

SUPPLIERS

        During fiscal 2014, our ten largest suppliers accounted for approximately 42% of the merchandise purchased. Only one of our suppliers accounted for more than 10% of our purchases. We have one long-term contract under which we are required to purchase merchandise. We believe that the relationships that we have established with our suppliers are generally good.

        In the past, we have not experienced difficulty in obtaining satisfactory sources of supply and we believe that adequate alternative sources of supply exist, at similar cost, for the types of merchandise sold in our stores.

COMPETITION

        We operate in a highly competitive environment. We encounter competition from national and regional chains, automotive dealerships and from local independent service providers and merchants. Our competitors include general, full range and discount department stores and online retailers which carry automotive parts and accessories and/or have automotive service centers, as well as specialized automotive retailers. Generally, the specialized automotive retailers focus on either DIFM or DIY. We believe that our operation in both DIFM and DIY differentiates us from most of our competitors. However, certain competitors are larger in terms of sales volume and/or number of stores. Therefore, these competitors have access to greater capital and management resources and have either been operating longer or have more stores in particular geographic areas. The principal methods of competition in our industry include store location, customer service, product offerings, quality and price.

REGULATION

        We are subject to various federal, state and local laws and governmental regulations relating to the operation of our business, including those governing the handling, storage and disposal of hazardous substances contained in the products that we sell and use in our service bays, the recycling of batteries, tires and used lubricants, the sale of small engine merchandise and the ownership and operation of real property.

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EMPLOYEES

        At January 31, 2015, the Company employed 18,646 persons as follows:

Description
  Full-time   %   Part-time   %   Total   %  

Retail

    4,170     29.4     2,600     58.2     6,770     36.3  

Service center

    8,575     60.5     1,805     40.4     10,380     55.7  

Store total

    12,745     89.9     4,405     98.6     17,150     92.0  

Warehouses

    603     4.3     58     1.3     661     3.5  

Offices

    828     5.8     7     0.1     835     4.5  

Total employees

    14,176     100.0     4,470     100.0     18,646     100.0  

        We had no union employees as of January 31, 2015. At February 1, 2014, we employed 13,874 full-time and 5,040 part-time employees.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

        Certain statements contained herein, including in "Item 1 Business" and "Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations", constitute "forward-looking statements" within the meaning of The Private Securities Litigation Reform Act of 1995. The words "guidance", "expect", "anticipate", "estimates", "targets", "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"). See "Item 1A Risk Factors." Forward-looking statements speak only as of the date they are made. We assume no obligation to update or supplement forward-looking statements that become untrue because of subsequent events.

SEC REPORTING

        We electronically file certain documents with, or furnish such documents to, the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, along with any related amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. From time-to-time, we may also file registration and related statements pertaining to equity or debt offerings. The SEC maintains an Internet website at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file or furnish documents electronically with the SEC. All of our filings can be accessed through the Securities and Exchange Commission website at www.sec.gov and searching with our ticker symbol "PBY".

        We provide free electronic access to our annual, quarterly and current reports (and all amendments to these reports) on our Internet website, www.pepboys.com, under the Investor Relations/Financial Information/SEC Filings link. These reports are available on our website as soon as

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reasonably practicable after we electronically file or furnish such materials with or to the SEC. Information on our website does not constitute part of this Annual Report, and any references to our website herein are intended as inactive textual references only.

        Copies of our SEC reports are also available free of charge. Please call our investor relations department at 215-430-9105 or write Pep Boys, Investor Relations, 3111 West Allegheny Avenue, Philadelphia, PA 19132 to request copies.

EXECUTIVE OFFICERS OF THE COMPANY

        The following table indicates the name, age, tenure with the Company and position (together with the year of election to such position) of the executive officers of the Company:

Name
  Age   Tenure with
Company
as of April 2015
  Position with the Company and Date of Election to Position

John T. Sweetwood

    67   1 year   Interim Chief Executive Officer since September 2014

David R. Stern

    48   3 years   Executive Vice President—Chief Financial Officer since September 2012

Christopher J. Adams

    47   2 years   Senior Vice President—Store Operations since March 2013

Thomas J. Carey

    57   3 years   Senior Vice President—Chief Customer Officer since August 2012

Joseph A. Cirelli

    56   38 years   Senior Vice President—Business Development since November 2007

James F. Flanagan

    54   2 years   Senior Vice President—Chief Human Resources Officer since August 2013

John J. Kelly

    57   1 year   Senior Vice President—Merchandising since March 2014

Brian D. Zuckerman

    45   16 years   Senior Vice President—General Counsel & Secretary since March 2009

        John T. Sweetwood, a member of the Board since 2002, was appointed to serve as interim Chief Executive Officer of the Company in September 2014. Mr. Sweetwood is principal and the President of Woods Investment, LLC a private real estate firm. From 1995 through 2002, Mr. Sweetwood served as an officer, and ultimately as President of The Americas, of Six Continents Hotels (currently, Intercontinental Hotels Group), a division of Six Continents PLC (currently IHG PLC) that operates hotels under the InterContinental, Crown Plaza, Holiday Inn and other brands.

        David R. Stern joined Pep Boys in September 2012 after having most recently served as Executive Vice President, Chief Administrative Officer and Chief Financial Officer of A.C. Moore Arts and Crafts. From 2007 until 2009, Mr. Stern held roles at Coldwater Creek, including Vice President, Financial Planning and Analysis and Corporate Controller. From 2000 to 2007, Mr. Stern was the Chief Financial Officer of Petro Services. Mr. Stern began his career as an internal auditor and gained experience as a financial analyst, accounting manager and corporate controller at several companies, including Delhaize America, before joining Petro Services.

        Christopher J. Adams joined Pep Boys in March 2013 after having most recently served as Chief Operating Officer of CarGroup Holdings LLC d/b/a webuyanycar.com since November 2010. From July 2008 to September 2010, Mr. Adams served as Chief Operating Officer of The BabyPlus Company, a manufacturer and distributor of a prenatal education system. From November 2006 to July 2008, Mr. Adams served as Chief Operating Officer of Holland Partners, a developer and manager of multifamily communities. Mr. Adams began his career at Enterprise Rent-A-Car in September 1989

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where through July 2006 he progressed from a management trainee to become one of the executives selected to open up and lead Enterprise's U.K. operations.

        Thomas J. Carey joined Pep Boys in August 2012 after having most recently served as Senior Vice President and Chief Marketing Officer for Orchard Supply Hardware Stores. From March 2003 to June 2007, Mr. Carey served as Senior Vice President, Chief Marketing Officer, of West Marine, Inc. Prior to joining West Marine, Mr. Carey served in various marketing leadership positions of increasing seniority with several national retailers, including Sunglass Hut, Bloomingdale's and Builders Square. Mr. Carey also has agency experience with, among others, Ogilvy & Mather and Young & Rubicam.

        Joseph A. Cirelli was named Senior Vice President—Corporate Development in November 2007. Since March 1977, Mr. Cirelli has served the Company in positions of increasing seniority, including Senior Vice President—Service, Vice President—Real Estate and Development, Vice President—Operations Administration, and Vice President—Customer Satisfaction.

        James F. Flanagan joined Pep Boys in August 2013 after having most recently served as the Senior Vice President of Human Resources for Procurian, a comprehensive procurement solution company. From 2004 to 2012, Mr. Flanagan served as Executive President, Human Resources of GSI Commerce. Mr. Flanagan's 20+ years of human resources leadership experience also included positions at Starbucks, Starwood Hotels, Sheraton Hotels, Bank of America and homegrocer.com. Mr. Flanagan began his career as a labor and employment attorney.

        John J. Kelly joined Pep Boys in March 2014 after having most recently served as President of Decible, a start-up electronics joint-venture, since June 2013. From April 2009 to May 2013, Mr. Kelly served as Vice President of Home Merchandising of QVC. Prior to joining QVC, Mr. Kelly served as Chief Merchandising Officer of Circuit City Stores. Mr. Kelly's 30+ years of merchandising leadership experience also included positions at Sharp Electronics and Macy's.

        Brian D. Zuckerman was named Senior Vice President—General Counsel & Secretary on March 1, 2009 after having most recently served as Vice President—General Counsel & Secretary since 2003. Mr. Zuckerman joined the Company as a staff attorney in 1999. Prior to joining Pep Boys, Mr. Zuckerman practiced corporate and securities law with two firms in Philadelphia.

        Each of the executive officers serves at the pleasure of the Board of Directors of the Company.

ITEM 1A    RISK FACTORS

        The following section discloses all known material risks that we face. However, it does not include risks that may arise in the future that are yet unknown nor existing risks that we do not judge material to the presentation of our financial statements. If any of the events or circumstances described as risk below actually occurs, our business, results of operations and/or financial condition could be materially and adversely affected.

Risks Related to Pep Boys

         We may not be able to successfully implement our business strategy, which could adversely affect our business, financial condition, results of operations and cash flows.

        Our long-term strategic plan, which we update annually, includes numerous initiatives including our "Road Ahead" remodels and store growth programs to increase sales, enhance our margins and increase our return on invested capital in order to increase our earnings and cash flow. If these initiatives are unsuccessful, or if we are unable to implement the initiatives efficiently and effectively, our business, financial condition, results of operations and cash flows could be adversely affected.

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        Successful implementation of our business strategy also depends on factors specific to the automotive aftermarket industry, many of which may be beyond our control (see "Risks Related to Our Industry").

         If we are unable to generate sufficient cash flows from our operations, our liquidity will suffer and we may be unable to satisfy our obligations.

        We require significant capital to fund our business. While we believe we have the ability to sufficiently fund our planned operations and capital expenditures for the next fiscal year, circumstances could arise that would materially affect our liquidity. For example, cash flows from our operations could be affected by changes in consumer spending habits or the failure to maintain favorable supplier payment terms or our inability to successfully implement sales growth initiatives. We may be unsuccessful in securing alternative financing when needed, on terms that we consider acceptable, or at all.

        The degree to which we are leveraged could have important consequences on investments in our securities, including the following risks:

    our ability to obtain additional financing for working capital, capital expenditures, acquisitions or general corporate purposes may be impaired in the future;

    a substantial portion of our cash flow from operations must be dedicated to the payment of rent and the principal and interest on our debt, thereby reducing the funds available for other purposes;

    our failure to comply with financial and operating restrictions placed on us and our subsidiaries by our credit facilities could result in an event of default that, if not cured or waived, could have a material adverse effect on our business or our prospects; and

    if we are substantially more leveraged than some of our competitors, we might be at a competitive disadvantage to those competitors that have lower debt service obligations and significantly greater operating and financial flexibility than we do.

         We have recognized substantial goodwill impairment charges and may be required to recognize additional goodwill impairment charges in the future.

        At January 31, 2015, we had $32.9 million of goodwill on our balance sheet. Certain factors, including consumer and business spending levels, industry and macroeconomic conditions, competition, the price of our stock and the future profitability of our business might have a negative impact on the carrying value of our goodwill. Our reporting units have experienced challenging economic, industry and operating pressures, and if these pressures were to continue for a sustained period of time, this would increase the risk associated with their significant goodwill balances. The process of testing goodwill for impairment involves numerous judgments, assumptions and estimates made by management which inherently reflect a high degree of uncertainty. If the business climate deteriorates, then actual results may not be consistent with these judgments, assumptions and estimates, and our goodwill may become impaired in future periods. The amount of this impairment could have an adverse impact on our financial position and results of operations.

         We depend on our relationships with our suppliers and a disruption of these relationships or of our suppliers' operations could have a material adverse effect on our business and results of operations.

        Our business depends on developing and maintaining productive relationships with our suppliers. Many factors outside our control may harm these relationships. For example, financial difficulties that some of our suppliers may face could increase the cost of the products we purchase from them or might interrupt our source of supply. In addition, our failure to promptly pay or order sufficient

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quantities of inventory from our suppliers may increase the cost of products we purchase or could lead to suppliers refusing to sell products to us at all.

        A disruption of our supplier relationships or a disruption in our suppliers' operations could have a material adverse effect on our business and results of operations.

         We depend on our senior management team and our other personnel, and we face substantial competition for qualified personnel.

        Our success depends in part on the efforts of our senior management team. Our continued success will also depend on our ability to retain existing, and attract additional, qualified field personnel to meet our needs. We face substantial competition, both from within and outside of the automotive aftermarket, to retain and attract qualified personnel. In addition, we believe that the number of qualified automotive service technicians in the industry is generally insufficient to meet demand.

         We are subject to environmental laws and may be subject to environmental liabilities that could have a material adverse effect on us in the future.

        We are subject to various federal, state and local environmental laws and governmental regulations relating to the operation of our business, including those governing the handling, storage and disposal of hazardous substances contained in the products we sell and use in our service bays, the recycling of batteries, tires and used lubricants, the ownership and operation of real property and the sale of small engine merchandise. When we acquire or dispose of real property or enter into financings secured by real property, we undertake investigations that may reveal soil and/or groundwater contamination at the subject real property. All such known contamination has either been remediated, or is in the process of being remediated. Any costs expected to be incurred related to such contamination are either covered by insurance or financial reserves provided for in the consolidated financial statements. However, there exists the possibility of additional soil and/or groundwater contamination on our real property where we have not undertaken an investigation. A failure by us to comply with environmental laws and regulations could have a material adverse effect on us.

         A breach of our security could compromise customer, employee or Company information and could harm our reputation, lead to substantial additional costs, or possible litigation.

        In the course of business, personal information about our customers and employees is stored both electronically and physically. We have taken reasonable and appropriate steps to safeguard this information. If this information is compromised, however, our reputation could be damaged resulting in lost business, we could incur additional costs in remediating the issue, or we could face possible regulatory action. The regulatory environment related to information security and privacy is constantly evolving, and compliance with those requirements could result in additional costs. There is no guarantee that the procedures we have implemented are adequate to safeguard all confidential information, and a breach of this information could potentially have a negative impact on our results of operations and financial condition.

         Business interruptions may negatively impact our store hours, operability of our computer systems and the availability and cost of merchandise which may adversely impact our sales and profitability.

        War or acts of terrorism, hurricanes, tornadoes, earthquakes or other natural disasters, or the threat of any of these calamities or others, may have a negative impact on our ability to obtain merchandise to sell in our stores, result in certain of our stores being closed for an extended period of time, negatively affect the lives of our customers or associates, or otherwise negatively impact our operations. Some of our merchandise is imported from other countries. If imported goods become

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difficult or impossible to import into the United States, and if we cannot obtain such merchandise from other sources at similar costs, our sales and profit margins may be negatively affected.

        In the event that commercial transportation is curtailed or substantially delayed, our business may be adversely impacted, as we may have difficulty receiving merchandise from our suppliers and shipping it to our stores.

        Terrorist attacks, war, or insurrection involving any oil producing country would likely result in an abrupt increase in the price of crude oil, gasoline, diesel fuel and other types of energy. Such price increases would increase the cost of doing business for us and our suppliers, and also would negatively impact our customers' disposable income and have an adverse impact on our business, sales, profit margins and results of operations.

        We rely extensively on our computer systems and the systems of our business partners to manage inventory, process transactions and report results. Any such systems are subject to damage or interruption from power outages, telecommunication failures, computer viruses, security breaches and catastrophic events. If our computer systems or those of our business partners fail we may experience loss of critical data and interruptions or delays in our ability to process transactions and manage inventory. Any such loss, if widespread or extended, could adversely affect the operation of our business and our results of operations.

Risks Related to Our Industry

         Our industry is highly competitive, and price competition in some segments of the automotive aftermarket, or a loss of trust in our participation in the "do-it-for-me" market, could cause a material decline in our revenues and earnings.

        The automotive aftermarket retail and service industry is highly competitive and subjects us to a wide variety of competitors. We compete primarily with the following types of businesses in each segment of the automotive aftermarket:

Retail

    Do-It-Yourself

    automotive parts and accessories stores;

    automobile dealers that supply manufacturer replacement parts and accessories;

    mass merchandisers and wholesale clubs that sell automotive products and select non-automotive merchandise that appeals to automotive "Do-It-Yourself" customers, such as generators, power tools and canopies; and

    online retailers

    Commercial

    mass and on-line merchandisers, wholesalers and jobbers (some of which are associated with national parts distributors or associations).

Service

    Do-It-For-Me

    regional and local full service automotive repair shops;

    automobile dealers that provide repair and maintenance services;

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    national and regional (including franchised) tire retailers that provide additional automotive repair and maintenance services; and

    national and regional (including franchised) specialized automotive (such as oil change, brake and transmission) repair facilities that provide additional automotive repair and maintenance services.

    Tires

    national and regional (including franchised) tire retailers; and

    mass merchandisers and wholesale clubs that sell tires.

        A number of our competitors have more financial resources, are more geographically diverse, have a higher geographic market concentration or have better name recognition than we do, which might place us at a competitive disadvantage to those competitors. Because we seek to offer competitive prices, if our competitors reduce their prices we may reduce our prices, which could cause a material decline in our revenues and earnings.

        With respect to the service labor category, the majority of consumers are unfamiliar with their vehicle's mechanical operation and, as a result, often select a service provider based on trust. Potential occurrences of negative publicity associated with the Pep Boys brand, the products we sell or installation or repairs performed in our service bays, whether or not factually accurate, could cause consumers to lose confidence in our products and services in the short or long term, and cause them to choose our competitors for their automotive service needs.

         Vehicle miles driven may decrease, resulting in a decline of our revenues and negatively affect our results of operations.

        Our industry is significantly influenced by the number of vehicle miles driven. Factors that may cause the number of vehicle miles and our revenues and our results of operations to decrease include:

    the weather—as vehicle maintenance may be deferred during periods of inclement weather;

    the economy—as during periods of poor economic conditions, customers may defer vehicle maintenance or repair and drive less due to unemployment, and during periods of good economic conditions, consumers may opt to purchase new vehicles rather than service the vehicles they currently own and replace worn or damaged parts;

    gas prices—as increases in gas prices may deter consumers from using their vehicles; and

    travel patterns—as changes in travel patterns may cause consumers to rely more heavily on mass transportation.

         Economic factors affecting consumer spending habits may continue, resulting in a decline in revenues and could negatively impact our business.

        Many economic and other factors outside our control, including consumer confidence, consumer spending levels, employment levels, consumer debt levels and inflation, as well as the availability of consumer credit, affect consumer spending habits. A significant deterioration in the global financial markets and economic environment, recessions or an uncertain economic outlook could adversely affect consumer spending habits and result in lower levels of economic activity. The domestic and international political situation also affects consumer confidence. Any of these events and factors could cause consumers to curtail spending, especially with respect to our more discretionary merchandise offerings, such as automotive accessories, tools and personal transportation products.

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         Consolidation among our competitors may negatively impact our business.

        Our industry has experienced consolidation over time. If this trend continues or if our competitors are able to achieve efficiencies in their mergers, the Company may face greater competitive pressures in the markets in which we operate.

ITEM 1B    UNRESOLVED STAFF COMMENTS

        None.

ITEM 2    PROPERTIES

        The Company owns its five-story, approximately 300,000 square foot corporate headquarters in Philadelphia, Pennsylvania. The Company also owns the following administrative regional offices—approximately 4,000 square feet of space in each of Melrose Park, Illinois and Bayamon, Puerto Rico. The Company leases an administrative regional office of approximately 3,500 square feet in Los Angeles, California.

        Of the 806 store locations operated by the Company at January 31, 2015, 226 are owned and 580 are leased. As of January 31, 2015, 141of the 225 stores owned by the Company are currently used as collateral under our Senior Secured Term Loan, due October 2018.

        The following table sets forth certain information regarding the owned and leased warehouse space utilized by the Company to replenish its store locations at January 31, 2015:

Warehouse Locations
  Products
Warehoused
  Approximate
Square
Footage
  Owned
or
Leased
  Stores
Serviced
  States Serviced

San Bernardino, CA

  All     600,000   Leased     194   AZ, CA, NV, UT, WA

McDonough, GA

  All     392,000   Owned     222   AL, FL, GA, LA, NC, PR, SC, TN

Mesquite, TX

  All     244,000   Owned     81   AR, CO, LA, MO, NM, OK, TX

Plainfield, IN

  All     403,000   Owned     81   IL, IN, KY, MI, MN, OH, PA

Chester, NY

  All     402,000   Owned     197   CT, DE, MA, MD, ME, NH, NJ, NY, PA, RI, VA

Philadelphia, PA

  Tires     54,000   Leased     61   DE, NJ, PA, VA, MD

Total

        2,095,000              

        The Company anticipates that its existing and future warehouse space and its access to outside storage will accommodate inventory necessary to support future store expansion and any increase in SKUs through the end of fiscal 2015.

ITEM 3    LEGAL PROCEEDINGS

        The Company is party to various 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 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 will 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 4    MINE SAFETY DISCLOSURES

        Not applicable.

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PART II

ITEM 5    MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

        The common stock of The Pep Boys—Manny, Moe & Jack is listed on the New York Stock Exchange under the symbol "PBY." There were 3,376 registered shareholders as of March 31, 2015. Since January 29, 2012 we have not paid a dividend on our common stock. The following table sets forth for the periods listed, the high and low sale prices of the Company's common stock, as reported by the New York Stock Exchange:

 
  Market Price
Per Share
 
 
  High   Low  

Fiscal 2014

             

Fourth quarter

  $ 10.09   $ 8.43  

Third quarter

    11.52     8.45  

Second quarter

    11.52     9.86  

First quarter

    13.27     10.17  

Fiscal 2013

             

Fourth quarter

  $ 13.86   $ 11.36  

Third quarter

    13.05     11.01  

Second quarter

    12.94     11.14  

First quarter

    12.14     10.29  

        On December 12, 2012, the Company's Board of Directors authorized a program to repurchase up to $50.0 million of the Company's common stock to be made from time to time in the open market or in privately negotiated transactions, with no expiration date.

        The Company did not repurchase any common stock in Fiscal 2014. The Company repurchased 238,000 shares of common stock for $2.8 million in Fiscal 2013 and 35,000 shares of common stock for $0.3 million in Fiscal 2012. The repurchased shares are included in the Company's treasury stock.

EQUITY COMPENSATION PLANS

        The following table sets forth the Company's shares authorized for issuance under its equity compensation plans at January 31, 2015:

 
  Number of
securities to be
issued upon
exercise of
outstanding
options,
warrants and
rights (a)
  Weighted
average
exercise
price of
outstanding
options,
warrants and
rights (b)
  Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in the first
column (a))
 

Equity compensation plans approved by security holders

    2,643,520   $ 5.39     4,392,242  

        The Company maintains an Employee Stock Purchase Plan with an authorized aggregate share limit of 2,000,000 shares of Pep Boys' Common Stock. Eligible employees can elect to have up to 10 percent of compensation deducted for purchase of Company stock at a discount under the Plan. For fiscal 2014, 2013, and 2012, respectively, the total number of shares sold to employees was 73,058; 62,547; and 39,552. As of January 31, 2015, the total remaining for purchase was 1,803,880 shares.

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STOCK PRICE PERFORMANCE

        The following graph compares the cumulative total return on shares of Pep Boys stock over the past five years with the cumulative total return on shares of companies in (1) the Standard & Poor's SmallCap 600 Index, (2) the S&P 600 Automotive Retail Index and (3) an index of peer and comparable companies as determined by the Company. The comparison assumes that $100 was invested in January 2010 in Pep Boys Stock and in each of the indices and assumes reinvestment of dividends. The S&P 600 Automotive Retail Index consists of companies in the S&P SmallCap 600 index that meet the definition of the automotive retail classification, and is currently comprised of: Group 1 Automotive, Inc.; Lithia Motors, Inc.; Monro Muffler Brake, Inc.; Sonic Automotive, Inc.; and The Pep Boys—Manny, Moe & Jack. The companies currently comprising the Peer Group are: Aaron's, Inc.; Advance Auto Parts, Inc.; AutoZone, Inc.; Big 5 Sporting Goods Corp.; Cabelas, Inc.; Conn's, Inc.; Dick's Sporting Goods, Inc.; HHGregg, Inc.; Midas, Inc. (included through FYE 2012); Monro Muffler Brake, Inc.; O'Reilly Automotive, Inc.; PetSmart, Inc.; RadioShack Corp.; Rent-A-Center, Inc.; Tractor Supply Co.; West Marine, Inc.

GRAPHIC

Company/Index
  Jan. 2010   Jan. 2011   Jan. 2012   Jan. 2013   Jan. 2014   Jan. 2015  

Pep Boys

  $ 100.00   $ 169.33   $ 147.85   $ 134.76   $ 146.14   $ 103.18  

S&P SmallCap 600 Index

    100.00     130.07     141.61     164.30     208.71     221.55  

Peer Group

    100.00     149.64     196.70     225.24     286.45     344.82  

S&P 600 Automotive Retail Index

    100.00     142.91     182.72     221.17     252.21     298.88  

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ITEM 6    SELECTED FINANCIAL DATA

        The following tables set forth the selected financial data for the Company and should be read in conjunction with the Consolidated Financial Statements and Notes thereto included elsewhere herein.

Fiscal Year Ended
  Jan. 31, 2015 (52 weeks)   Feb. 1, 2014 (52 weeks)   Feb. 2, 2013 (53 weeks)   Jan. 28, 2012 (52 weeks)   Jan. 29, 2011 (52 weeks)  
 
  (dollar amounts are in thousands, except per share data)
 

STATEMENT OF OPERATIONS DATA

                               

Merchandise sales

  $ 1,593,883   $ 1,608,697   $ 1,643,948   $ 1,642,757   $ 1,598,168  

Service revenue

    490,720     457,871     446,782     420,870     390,473  

Total revenues

    2,084,603     2,066,568     2,090,730     2,063,627     1,988,641  

Costs of merchandise sales

    1,124,755     1,108,359     1,159,994     1,154,322     1,110,380  

Cost of service revenue

    484,404     470,832     439,236     399,776     355,909  

Gross profit from merchandise sales(10)

    469,128 (1)   500,338 (3)   483,954 (4)   488,435 (7)   487,788 (9)

Gross (loss) profit from service revenue(10)

    6,316 (1)   (12,961 )(3)   7,546 (4)   21,094 (7)   34,564 (9)

Total gross profit

    475,444 (1)   487,377 (3)   491,500 (4)   509,529 (7)   522,352 (9)

Selling, general and administrative expenses

    484,182 (2)   464,852     463,416     443,986     442,239  

Pension settlement expense

            17,753          

Goodwill impairment

    23,925                  

Net (gain) loss from disposition of assets

    (13,806 )   227     (1,323 )   (27 )   (2,467 )

Operating (loss) profit

    (18,857 )   22,298     11,654     65,570     82,580  

Merger termination fees, net

            42,816 (5)        

Non-operating income

    1,188     1,789     2,012     2,324     2,609  

Interest expense

    (13,873 )   (14,797 )   (33,982 )(6)   (26,306 )   (26,745 )

(Loss) earnings from continuing operations before income taxes and discontinued operations

    (31,542 )   9,290     22,500     41,588     58,444  

Income tax (benefit) expense

    (4,581 )   2,237     9,345     12,460 (8)   21,273 (8)

(Loss) earnings from continuing operations before discontinued operations

    (26,961 )   7,053     13,155     29,128     37,171  

Discontinued operations, net of tax

    (332 )   (188 )   (345 )   (225 )   (540 )

Net (loss) earnings

    (27,293 )   6,865     12,810     28,903     36,631  

BALANCE SHEET DATA

                               

Working capital

  $ 155,172   $ 131,029   $ 126,505   $ 166,627   $ 203,367  

Current ratio

    1.24 to 1     1.19 to 1     1.18 to 1     1.27 to 1     1.36 to 1  

Merchandise inventories

  $ 656,957   $ 672,354   $ 641,208   $ 614,136   $ 564,402  

Property and equipment-net

  $ 604,380   $ 625,525   $ 657,270   $ 696,339   $ 700,981  

Total assets

  $ 1,541,741   $ 1,605,481   $ 1,603,949   $ 1,633,779   $ 1,556,672  

Long-term debt, excluding current maturities

  $ 211,000   $ 199,500   $ 198,000   $ 294,043   $ 295,122  

Total stockholders' equity

  $ 524,150   $ 548,065   $ 537,572   $ 504,329   $ 478,460  

DATA PER COMMON SHARE

                               

Basic (loss) earnings from continuing operations before discontinued operations

  $ (0.50 ) $ 0.13   $ 0.25   $ 0.55   $ 0.71  

Basic (loss) earnings

    (0.51 )   0.13     0.24     0.54     0.70  

Diluted (loss) earnings from continuing operations before discontinued operations

    (0.50 )   0.13     0.24     0.54     0.70  

Diluted (loss) earnings

    (0.51 )   0.13     0.24     0.54     0.69  

Cash dividends declared

                0.12     0.12  

Book value

    9.78     10.30     10.12     9.56     9.10  

Common share price range:

                               

High

    13.27     13.86     15.46     14.70     15.96  

Low

    8.43     10.29     8.67     8.18     7.86  

OTHER STATISTICS

                               

Return on average stockholders' equity(11)

    (5.0 )%   1.3 %   2.4 %   5.8 %   7.9 %

Common shares issued and outstanding

    53,568,836     53,198,169     53,125,743     52,753,719     52,585,131  

Capital expenditures

  $ 67,269   $ 53,982   $ 54,696   $ 74,746   $ 70,252  

Number of stores

    806     799     758     738     621  

Number of service bays

    7,524     7,520     7,303     7,182     6,259  

(1)
Includes an aggregate pretax charge of $7.5 million for asset impairment, of which $2.5 million was charged to merchandise cost of sales, $5.0 million was charged to service cost of sales.

(2)
Includes $4.0 million in litigation expense.

(3)
Includes an aggregate pretax charge of $7.7 million for asset impairment, of which $2.4 million was charged to merchandise cost of sales, $5.3 million was charged to service cost of sales.

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(4)
Includes an aggregate pretax charge of $10.6 million for asset impairment, of which $5.1 million was charged to merchandise cost of sales, $5.5 million was charged to service cost of sales.

(5)
In fiscal 2012, we recorded settlement proceeds, net of merger related costs of $42.8 million, resulting from the termination of the "go private" transaction.

(6)
Includes $11.2 million of fees associated with debt refinancing.

(7)
Includes an aggregate pretax charge of $1.6 million for asset impairment, of which $0.6 million was charged to merchandise cost of sales, $1.0 million was charged to service cost of sales.

(8)
Includes a tax benefit of $3.6 million and $2.2 million in Fiscal 2011 and Fiscal 2010, respectively, due to the release of valuation allowances on state net operating loss carryforwards and credits.

(9)
Includes a pretax benefit of $5.9 million due to the reduction in reserve for excess inventory which reduced merchandise cost of sales and an aggregate pretax charge of $1.0 million for asset impairment, of which $0.8 million was charged to merchandise cost of sales and $0.2 million was charged to service cost of sales.

(10)
Gross profit from merchandise sales includes the cost of products sold, buying, warehousing and store occupancy costs. Gross profit from service revenue includes the cost of installed products sold, buying, warehousing, service payroll and related employee benefits and occupancy costs. Occupancy costs include utilities, rents, real estate and property taxes, repairs and maintenance and depreciation and amortization expenses. Our gross profit may not be comparable to those of our competitors due to differences in industry practice regarding the classification of certain costs.

(11)
Return on average stockholders' equity is calculated by dividing net earnings (loss) for the period by average stockholders' equity for the year.

ITEM 7    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

        The following discussion and analysis explains the results of our operations for fiscal 2014 and 2013 and developments affecting our financial condition as of January 31, 2015. This discussion and analysis below should be read in conjunction with Item 6 "Selected Consolidated Financial Data," and our consolidated financial statements and the notes included elsewhere in this report. The discussion and analysis contains "forward looking statements" within the meaning of The Private Securities Litigation Reform Act of 1995. 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. Actual results may differ materially from the results discussed in the forward looking statements due to a number of factors beyond our control, including those set forth under the section entitled "Item 1A Risk Factors" elsewhere in this report.

Introduction

        The Pep Boys—Manny, Moe & Jack (and subsidiaries, the "Company") has been the best place to shop and care for your car since it began operations in 1921. Approximately 19,000 associates are focused on delivering the best customer service in the automotive aftermarket industry across 806 locations located throughout the United States and Puerto Rico. Pep Boys satisfies all of a customer's automotive needs through our unique offering of service, tires, parts and accessories.

        Our stores are organized into a hub and spoke network consisting of Supercenters and Service & Tire Centers. Supercenters average approximately 20,000 square feet (our new Supercenter format is approximately 14,000 square feet) and combine do-it-for-me service labor, installed merchandise and tire offerings ("DIFM") with do-it-yourself parts and accessories ("DIY"). Most of our Supercenters also have a commercial sales program that provides prompt delivery of parts, tires and equipment to automotive repair shops and dealers. Service & Tire Centers, which average approximately 5,000 square feet, provide DIFM services in neighborhood locations that are conveniently located where our customers live or work. Service & Tire Centers are designed to capture market share and leverage our

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existing Supercenters and support infrastructure. We also operate a handful of legacy DIY only Pep Express stores.

        In fiscal 2014, we opened 19 new Service & Tire Centers, two new Supercenters and converted one Supercenter into a Service & Tire Center. We also closed eight Service & Tire Centers and six Supercenters. As of January 31, 2015, we operated 563 Supercenters, 237 Service & Tire Centers and six Pep Express stores located in 35 states and Puerto Rico.

EXECUTIVE SUMMARY

        Net loss for fiscal 2014 was $27.3 million, or $0.51 per share, as compared to net earnings of $6.9 million, or $0.13 per share, reported for fiscal 2013. Fiscal 2014 results included, on a pre-tax basis a goodwill impairment charge of $23.9 million and a $4.0 million litigation charge, partially offset by a gain on sale of certain properties of $13.8 million.

        Total revenues increased by 0.9%, or $18.0 million, as compared to the same period in the prior year due to increased contribution from our non-comparable store locations. Our comparable store sales (sales generated by locations in operation during the same period of the prior year) remained relatively flat and were comprised of a 4.9% increase in comparable store service revenue offset by a 1.6% decrease in comparable store merchandise sales.

        We believe that the industry fundamentals of increasing vehicle complexity and customer preference for DIFM remain solid over the long-term resulting in consistent demand for maintenance and repair services. Consistent with this long-term trend, we have adopted a long-term strategy of growing our automotive service business, while maintaining our DIY customer base by offering the newest and broadest product assortment in the automotive aftermarket.

        In the short-term, however, various factors within the economy affect both our customers and our industry, including a weak recovery from the recent recession, continued high underemployment and the tepid growth in real wages. We believe that these factors challenge our customers' spending relative to discretionary and deferrable purchases. These spending habits impact miles driven which, in turn, impact sales of our services and non-discretionary products. Given the nature of these macroeconomic factors, we cannot predict whether or for how long these trends may continue, nor can we predict to what degree these trends will affect us in the future.

        Over the past few years, we have invested in our business to drive top line sales with investments in marketing & promotions, new stores (Service & Tire Centers), digital operations and, most recently, a new market concept that we call the "Road Ahead." Designed around the shopping habits of our target customer segments, this concept enhances the entire store—our people, the product assortment, its exterior and interior look and feel and the marketing programs—to learn how we can be successful in attracting more of these target customers and earn a greater share of their annual spend in the automotive aftermarket. While each initiative has produced results, they have also brought added expense. Total sales growth has been relatively flat due in large part to the decline in our DIY business, which combined with increased expenses has led to declining profit margins. Accordingly, we continue to review expenses related to our base business so we can continue to invest in our initiatives. See "ITEM 1 BUSINESS—BUSINESS STRATEGY."

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RESULTS OF OPERATIONS

        The following discussion explains the material changes in our results of operations for the years ended January 31, 2015, February 1, 2014 and February 2, 2013.

Analysis of Statement of Operations

        The following table presents, for the periods indicated, certain items in the 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 changes are reflected as favorable or (unfavorable).

 
  Percentage of Total Revenues   Percentage Change  
Year ended
  Jan 31, 2015
(Fiscal 2014)
  Feb 1, 2014
(Fiscal 2013)
  Feb 2, 2013
(Fiscal 2012
  Fiscal 2014 vs.
Fiscal 2013
  Fiscal 2013 vs.
Fiscal 2012
 

Merchandise sales

    76.5 %   77.8 %   78.6 %   (0.9 )%   (2.1 )%

Service revenue(1)

    23.5     22.2     21.4     7.2     2.5  

Total revenues

    100.0     100.0     100.0     0.9     (1.2 )

Costs of merchandise sales(2)

    70.6 (3)   68.9 (3)   70.6 (3)   (1.5 )   4.5  

Costs of service revenue(2)

    98.7 (3)   102.8 (3)   98.3 (3)   (2.9 )   (7.2 )

Total costs of revenues

    77.2     76.4     76.5     (1.9 )   1.3  

Gross profit from merchandise sales

    29.4 (3)   31.1 (3)   29.4 (3)   (6.2 )   3.4  

Gross (loss) profit from service revenue

    1.3 (3)   (2.8 )(3)   1.7 (3)   148.7     (271.8 )

Total gross profit

    22.8     23.6     23.5     (2.4 )   (0.8 )

Selling, general and administrative expenses

    23.2     22.5     22.2     (4.2 )   (0.3 )

Goodwill impairment

    1.1             (100.0 )    

Pension settlement expense

            0.9         100.0  

Net (gain) loss from disposition of assets

    (0.7 )       0.1     100.0     (117.2 )

Operating (loss) profit

    (0.9 )   1.1     0.6     (184.6 )   91.3  

Merger termination fees, net

            2.1         (100.0 )

Non-operating income

    0.1     0.1     0.1     (33.6 )   (11.1 )

Interest expense

    (0.7 )   (0.7 )   1.6     6.2     56.5  

(Loss) earnings from continuing operations before income taxes

    (1.5 )   0.5     1.1     (439.5 )   (58.7 )

Income tax (benefit) expense

    (14.5 )(4)   24.1 (4)   41.5 (4)   (304.8 )   76.1  

(Loss) earnings from continuing operations

    (1.3 )   0.3     0.6     (482.3 )   (46.4 )

Discontinued operations, net of tax

                (76.6 )   45.5  

Net (loss) earnings

    (1.3 )   0.3     0.6     (497.6 )   (46.4 )

(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, buying, 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 (loss) earnings from continuing operations before income taxes.

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Fiscal 2014 vs. Fiscal 2013

        Total revenue for fiscal 2014 increased by $18.0 million, or 0.9%, to $2,084.6 million from $2,066.6 million for fiscal 2013 driven by our non-comparable store locations, while comparable sales remained relatively flat. Comparable store sales were comprised of a 4.9% comparable service revenue increase offset by a 1.6% comparable merchandise sales decline. While our total revenues are favorably impacted by the opening of new stores, a new store is not added to our comparable store sales until it reaches its 13th month of operation.

        Our total online sales are currently an immaterial portion of our total sales and comparable store sales. Customer online purchases that are picked up at our stores or delivered to customers' homes are included in our comparable store sales calculation.

        Total merchandise sales decreased 0.9%, or $14.8 million, to $1,593.9 million for fiscal 2014, compared to $1,608.7 million for fiscal 2013. Comparable merchandise sales decreased by 1.6%, or $25.3 million. Our non-comparable stores contributed an additional $10.4 million of merchandise revenue in fiscal 2014.

        Total service revenue increased 7.2%, or $32.8 million, to $490.7 million for fiscal 2014 from $457.9 million for fiscal 2013. Comparable service revenue increased by 4.9%, or $22.3 million. Our non-comparable store locations contributed an additional $10.5 million of service revenues in fiscal 2014. The increase in comparable store service revenue was primarily due to an increase in the average transaction amount per customer.

        In our retail business, continued competitive pressures led to a comparable store customer counts decline of 5.1%, while higher selling price resulted in a 3.3% increase in average revenue per transaction.

        In our service business, we believe the decline in comparable store transaction counts of 2.0% was due primarily to a cooler than normal summer that reduced demand for batteries, air conditioning work and engine performance and diagnostic services. In addition, oil change transactions declined due to less promotional activity as compared to the prior year. Service average revenue per transaction increased by 3.4%, primarily due to higher selling prices and a shift in sales mix to higher priced tires.

        Total gross profit decreased by $11.9 million, or 2.4%, to $475.4 million for fiscal 2014 from $487.4 million for fiscal 2013. Total gross profit margin decreased to 22.8% for fiscal 2014 from 23.6% for fiscal 2013. Total gross profit for fiscal 2014 and 2013 included an asset impairment charge of $7.5 million and $7.7 million, respectively. Excluding this item from both years, total gross profit margin decreased to 23.2% for fiscal 2014 from 24.0% for fiscal 2013. The decrease was primarily due to lower vendor support funds, higher occupancy costs (utilities and rent) and higher warehousing costs.

        Gross profit from merchandise sales decreased by $31.2 million, or 6.2%, to $469.1 million for fiscal 2014 from $500.3 million for fiscal 2013. Gross profit margin from merchandise sales decreased to 29.4% for fiscal 2014 from 31.1% in fiscal 2013. Gross profit from merchandise sales in fiscal 2014 and 2013 included an asset impairment charge of $2.5 million and $2.3 million, respectively. Excluding this item from both years, gross profit margin from merchandise sales decreased to 29.6% for fiscal 2014 from 31.3% in fiscal 2013. The decrease in gross profit margin was primarily due to lower product margins resulting from a change in sales mix, lower vendor support funds, higher inventory obsolescence and shrinkage reserves and higher occupancy costs (utilities and rent)

        Gross margin profit from service revenue for fiscal 2014 improved by $19.3 million to a profit of $6.3 million from a loss of $13.0 million for fiscal 2013. In accordance with GAAP, service revenue is limited to labor sales (excludes any revenue from installed parts and materials) and costs of service revenues includes the fully loaded service center payroll and related employee benefits and service center occupancy costs (rents, utilities and building maintenance). Excluding impairment charges of

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$5.0 million and $5.3 million in fiscal 2014 and 2013, respectively, gross margin from service revenue increased by 400 basis points to 2.3% in fiscal 2014 from a loss of 1.7% in fiscal 2013. The increase in service revenue gross margin was primarily due to the leveraging effect of higher sales on the fixed component of payroll and related costs.

        Selling, general and administrative expenses as a percentage of total revenues increased to 23.2% for fiscal year 2014 from 22.5% for fiscal 2013. Selling, general and administrative expenses for fiscal 2014 increased $19.3 million, or 4.2%, to $484.2 million from $464.9 million for fiscal 2013 primarily due to, increased media costs of $5.6 million, higher severance expense of $2.3 million, higher legal expense of $4.6 million, higher general liability and automotive claims of $1.8 million and higher store selling expense due to store growth of $2.8 million.

        In the fourth quarter of fiscal 2014, we recorded a $23.9 million goodwill impairment charge (see Note 12 to the Consolidated Financial Statements).

        In the fourth quarter of 2014, we sold three stores, which resulted in a $14.0 million net gain from disposition of assets over the prior year.

        Interest expense for fiscal 2014 was $13.9 million, a decrease of $0.9 million from $14.8 million reported for fiscal 2013.

        Our income tax benefit for fiscal 2014 was $4.6 million, or an effective rate of 14.5%, as compared to an expense of $2.2 million, or an effective rate of 24.1%, for fiscal 2013. The decrease in the effective tax rate was primarily attributable to the mix of pre-tax (loss) earnings within certain jurisdictions, the impact of the non-deductible portion of the goodwill impairment charge, permanent tax differences in relation to pre-tax (loss) earnings and the effect of discrete items recorded in each year.

        As a result of the foregoing, we had a net loss of $27.3 million for fiscal 2014 as compared to net earnings of $6.9 million for fiscal 2013. Our diluted loss per share was $0.51 as compared to earnings per share of $0.13 in the prior year period.

Fiscal 2013 vs. Fiscal 2012

        Total revenue for fiscal 2013 decreased by $24.2 million, or 1.2%, to $2,066.6 million from $2,090.7 million for fiscal 2012. Excluding the fifty-third week in 2012, total revenue increased by $11.9 million, or 0.6%, while comparable sales decreased 1.3%. The decrease in comparable store sales was comprised of a 1.6% comparable service revenue increase offset by a 2.1% comparable merchandise sales decline. The decrease in comparable merchandise sales was primarily due to lower tires, oil and refrigerant sales. While our total revenues are favorably impacted by the opening of new stores, a new store is not added to our comparable store sales until it reaches its 13th month of operation.

        Our total online sales are currently an immaterial portion of our total sales and comparable store sales. Customer online purchases that are picked up at our stores are included in our comparable store sales calculation. Customer online purchases that are delivered to customers' homes are not included in our comparable store sales.

        Total merchandise sales decreased 2.1%, or $35.3 million, to $1,608.7 million for fiscal 2013, compared to $1,643.9 million for fiscal 2012. Excluding the fifty-third week in 2012, total merchandise sales declined 0.5%, or $7.6 million, while comparable merchandise sales decreased by 2.1%, or $34.1 million. Our non-comparable stores contributed an additional $26.5 million of merchandise revenue in fiscal 2013. The decrease in comparable store merchandise sales was driven primarily by lower tire, oil and refrigerant sales.

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        Total service revenue increased 2.5%, or $11.1 million, to $457.9 million for fiscal 2013 from $446.8 million for fiscal 2012. Excluding the fifty-third week in 2012, total service revenue increased 4.5%, or $19.6 million, while comparable service revenue increased by 1.6%, or $6.9 million. Our non-comparable store locations contributed an additional $12.7 million of service revenues in fiscal 2013. The increase in comparable store service revenue was primarily due to an increase in the average transaction amount per customer.

        In our retail business, we believe that the difficult macroeconomic conditions continue to impact our customers and led to the comparable store customer counts decline of 4.9%, while we experienced an increase in the average transaction amount per customer resulting from higher selling prices of 1.8%. In our service business, we believe that we experienced a slight increase in comparable store customer counts due to the strength of our service offering and our promotion of oil changes. However, this shift in service sales mix towards lower cost oil changes slightly reduced the average transaction amount per service customer.

        Total gross profit decreased by $4.1 million, or 0.8%, to $487.4 million for fiscal 2013 from $491.5 million for fiscal 2012. Total gross profit margin increased to 23.6% for fiscal 2013 from 23.5% for fiscal 2012. Total gross profit for fiscal 2013 and 2012 included an asset impairment charge of $7.7 million and $10.6 million, respectively. Excluding this item from both years, total gross profit margin remained relatively flat at 24.0%.

        Gross profit from merchandise sales increased by $16.4 million, or 3.4%, to $500.3 million for fiscal 2013 from $484.0 million for fiscal 2012. Gross profit margin from merchandise sales increased to 31.1% for fiscal 2013 from 29.4% in fiscal 2012. Gross profit from merchandise sales in fiscal 2013 and 2012 included an asset impairment charge of $2.3 million and $5.1 million, respectively. Excluding this item from both years, gross profit margin from merchandise sales improved to 31.3% in fiscal 2013 from 29.8% in the prior year. The improvement over the prior year was primarily due to improved product margins in tires, brakes, batteries and oil.

        Gross margin loss from service revenue for fiscal 2013 widened by $20.5 million to a loss of $13.0 million from profit of $7.5 million for fiscal 2012. In accordance with GAAP, service revenue is limited to labor sales (excludes any revenue from installed parts and materials) and costs of service revenues includes the fully loaded service center payroll and related employee benefits and service center occupancy costs (rents, utilities and building maintenance). Excluding impairment charges of $5.3 million and $5.4 million in fiscal 2013 and 2012, respectively, gross margin from service revenue decreased by 460 basis points to a 1.7% loss in fiscal 2013 from 2.9% profit in fiscal 2012. The decrease in service revenue gross profit margin was primarily due to higher payroll and related expense of 320 basis points and higher occupancy costs of 154 basis points (depreciation and rent).

        Selling, general and administrative expenses as a percentage of total revenues increased to 22.5% for fiscal year 2013 from 22.2% for fiscal 2012. Selling, general and administrative expenses for fiscal 2013 increased $1.4 million, or 0.3%, to $464.9 million from $463.4 million for fiscal 2012. The increase as a percentage of sales reflects de-leveraging of selling, general and administrative expenses through reduced sales in fiscal 2013(fiscal 2012 included 53 weeks).

        In the fourth quarter of fiscal 2012, in accordance with Internal Revenue Service and Pension Benefit Guaranty Corporation requirements, we contributed $14.1 million to fully fund our Defined Benefit Pension Plan on a termination basis and incurred a settlement charge of $17.8 million (see Note 14 to the Consolidated Financial Statements).

        In the fourth quarter of fiscal 2012, we sold our regional administration building in Los Angeles, CA, which resulted in a gain from disposition of assets, net of expenses, of $1.3 million.

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        In the second quarter of fiscal 2012, we terminated our proposed "go private" transaction and recorded the settlement proceeds, net of merger related costs, of $42.8 million in the consolidated statement of operations and comprehensive income.

        Interest expense for fiscal 2013 was $14.8 million, a decrease of $19.2 million, from $34.0 million reported for fiscal 2012. Excluding refinancing costs of $0.4 million and $11.2 million in fiscal 2013 and 2012, respectively, interest declined by $8.4 million and reflects a lower interest rate on reduced total debt outstanding. In the third quarter of fiscal 2012, we refinanced our long term debt to reduce the amount outstanding by $95.1 million and in the fourth quarter of fiscal 2013, we further reduced the interest rate on our Senior Secured Term Loan by 75 basis points (See Note 5 to the Consolidated Financial Statements).

        Our income tax expense for fiscal 2013 was $2.2 million, or an effective rate of 24.1%, as compared to an expense of $9.3 million, or an effective rate of 41.5%, for fiscal 2012. The decrease in rate from period to period was primarily driven by a reduction in pre-tax income in relation to certain permanent tax items and tax credits. In addition, the rate was impacted by a change in foreign tax law enacted during fiscal 2013 and a favorable adjustment to deferred tax assets in our foreign operations.

        As a result of the foregoing, we had net earnings of $6.9 million for fiscal 2013 as compared to net earnings of $12.8 million for fiscal 2012. Our diluted earnings per share were $0.13 as compared to $0.24 in the prior year period.

Discontinued Operations

        The analysis of our results of continuing operations excludes the operating results of closed stores, where the customer base could not be maintained, which have been classified as discontinued operations for all periods presented.

Industry Comparison

        We operate in the U.S. automotive aftermarket, which has two general lines of business: (1) the Service business, defined as Do-It-For-Me (service labor, installed merchandise and tires) and (2) the Retail business, defined as Do-It-Yourself (retail merchandise) and commercial. Generally, specialized automotive retailers focus on either the Service or Retail area of the business. We believe that operation in both the Service and Retail areas differentiates us from our competitors. Although we manage our store performance at a store level in the aggregate, we believe that the following presentation, which includes the reclassification of revenue from merchandise that we install in customer vehicles 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

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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 the business.

 
  Fiscal Year ended  
(dollar amounts in thousands)
  January 31,
2015
  February 1,
2014
  February 2,
2013
 

Service center revenue(1)

  $ 1,151,575   $ 1,110,958   $ 1,095,284  

Retail sales(2)

    933,028     955,610     995,446  

Total revenues

  $ 2,084,603   $ 2,066,568   $ 2,090,730  

Gross profit from service center revenue(3)

  $ 230,130   $ 209,853   $ 208,795  

Gross profit from retail sales(4)

    245,314     277,524     282,705  

Total gross profit

  $ 475,444   $ 487,377   $ 491,500  

(1)
Includes revenues from installed products.

(2)
Excludes revenues from installed products.

(3)
Gross profit from service center revenue includes the cost of installed products sold, buying, 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.

(4)
Gross profit from retail sales includes the cost of products sold, buying, warehousing and store occupancy costs. Occupancy costs include utilities, rents, real estate and property taxes, repairs and maintenance and depreciation and amortization expenses.

CAPITAL & LIQUIDITY

Capital Resources and Needs

        Our cash requirements arise principally from (i) the purchase of inventory and capital expenditures related to existing and new stores, offices and distribution centers, (ii) debt service and (iii) contractual obligations. Cash flows realized through the sale of automotive services, tires, parts and accessories are our primary source of liquidity. Net cash provided by operating activities was $27.4 million in fiscal 2014, as compared to $59.4 million in the prior year. The $32.0 million decrease was due to a decrease in net earnings, net of non-cash adjustments of $35.7 million, offset by an increase in operating assets and liabilities of $4.1 million. The change in operating assets and liabilities was primarily due to a favorable change in inventory, net of accounts payable, of $10.2 million and a favorable change in other long-term liabilities of $1.0 million, offset by an unfavorable change in accrued expenses and other current assets of $7.1 million. The change in accrued expenses and other current assets was primarily due to the resolution of our accrued medical claims as we converted from a self-insured to a fully-insured program.

        Taking into consideration changes in our trade payable program liability (shown as cash flows from financing activities on the consolidated statements of cash flows), cash used in accounts payable was $16.9 million in fiscal 2014 as compared to $11.5 million for fiscal 2013. The ratio of accounts payable, including our trade payable program, to inventory was 56.0% at January 31, 2015 and 57.4% at February 1, 2014. The $15.4 million decrease in inventory from February 1, 2014 was primarily due to lower purchases in fiscal 2014.

        Cash used in investing activities was $47.0 million in fiscal 2014 as compared to $65.3 million in the prior year period. Capital expenditures were $67.3 million and $54.0 million in 2014 and 2013, respectively. Capital expenditures for 2014, in addition to our regularly scheduled store and distribution

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center improvements and information technology enhancements, included the addition of 21 new locations, the addition of 47 Speed Shops within existing Supercenters and the conversion of 28 Supercenters to the "Road Ahead' format. Capital expenditures in fiscal 2013, included the addition of 29 new locations, the conversion of 11 Supercenters into Superhubs, the addition of 63 Speed Shops within existing Supercenters. In addition, in the third quarter of 2013 the Company acquired 18 Service & Tire Centers in Southern California for $10.7 million. In the fourth quarter of 2014, the Company sold three locations for approximately $20.2 million.

        Our targeted capital expenditures for fiscal 2015 are approximately $60.0 million, which includes the planned addition of 15 Service & Tire Centers, one Supercenter, and the conversion of up to 25 stores to the new "Road Ahead" format. These expenditures are expected to be funded from cash on hand and net cash generated from operating activities. Additional capacity, if needed, exists under our existing line of credit.

        Cash provided by financing activities in fiscal 2014 was $24.2 million as compared to cash used in financing activities of $19.8 million in fiscal 2013. The cash provided by financing activities in fiscal 2014 was primarily related to net borrowings under our revolving credit facility of $13.5 million and $11.1 million under our trade payable program, as compared to net borrowings under the revolving credit facility of $3.5 million and net payments of $19.9 million under the trade payable program in 2013. In addition, in 2013, the Company repurchased 237,624 shares of common stock for $2.8 million. The trade payable program is funded by various bank participants who have the ability, but not the obligation, to purchase, directly from our suppliers, account receivables owed by Pep Boys. As of January 31, 2015 and February 1, 2014, we had an outstanding balance of $140.9 million and $129.8 million, respectively (classified as trade payable program liability on the consolidated balance sheet).

        We anticipate that cash on hand and cash generated by operating activities will exceed our expected cash requirements in fiscal 2015. In addition, we expect to have excess availability under our existing revolving credit agreement during the entirety of fiscal 2015. As of January 31, 2015, we had availability on our revolving credit facility of $138.4 million. As of January 31, 2015 we had $38.0 million of cash and cash equivalents on hand.

        Our working capital was $155.2 million and $131.0 million at January 31, 2015 and February 1, 2014, respectively. Our total debt, net of cash on hand, as a percentage of our net capitalization, was 25.0% and 23.5% at January 31, 2015 and February 1, 2014, respectively.

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    Contractual Obligations

        The following chart represents our total contractual obligations and commercial commitments as of January 31, 2015:

Contractual Obligations
  Total   Within
1 year
  From 1 to 3
years
  From 3 to 5
years
  After
5 years
 
 
  (dollars amounts in thousands)
 

Long-term debt(1)

  $ 213,000   $ 2,000   $ 21,000   $ 190,000      

Operating leases

    746,221     114,258     206,144     166,732     259,087  

Expected scheduled interest payments on long-term debt

    32,881     8,995     17,732     6,154      

Other long-term obligations(2)

    11,300                  

Total contractual obligations

  $ 1,003,402   $ 125,253   $ 244,876   $ 362,886   $ 259,087  

(1)
Long-term debt includes current maturities.

(2)
Comprised of deferred compensation items of $4.6 million, income tax liabilities of $0.8 million and asset retirement obligations of $5.9 million. The above table does not reflect the timing of projected settlements for our recorded deferred compensation plan obligation, asset retirement obligation costs and income tax liabilities because we cannot make a reliable estimate of the timing of the related cash payments.

Commercial Commitments
  Total   Within
1 year
  From 1 to 3
years
  From 3 to 5
years
  After
5 years
 
 
  (dollar amounts in thousands)
 

Commercial letters of credit

  $ 8,116   $ 5,156   $ 2,960   $   $  

Standby letters of credit

    27,003     26,903     100          

Surety bonds

    12,752     10,893     1,859          

Purchase obligations(1)(2)

    30,004     22,848     7,156          

Total commercial commitments

  $ 77,875   $ 65,800   $ 12,075   $   $  

(1)
Our open purchase orders are based on current inventory or operational needs and are fulfilled by our suppliers within short periods of time. We currently do not have minimum purchase commitments under our supply agreements (other than(2) below) and generally, our open purchase orders (orders that have not been shipped) are not binding agreements. Those purchase obligations that are in transit from our suppliers at January 31, 2015 that we do not have legal title to are considered commercial commitments.

(2)
In fiscal 2013, we renewed our commercial commitment to purchase 6.3 million units of oil products at various prices over a three-year period. Based on our present consumption rate, we expect to meet the cumulative minimum purchase requirements under this contract in fiscal 2016.

    Senior Secured Term Loan due October 2018

        On October 11, 2012, we entered into the Second Amended and Restated Credit Agreement among the Company, Wells Fargo Bank, N.A., as Administrative Agent, and the other parties thereto

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that (i) increased the size of our Senior Secured Term Loan (the "Term Loan") to $200.0 million, (ii) extended the maturity of the Term Loan from October 27, 2013 to October 11, 2018, (iii) reset the interest rate under the Term Loan to the London Interbank Offered Rate (LIBOR), subject to a floor of 1.25%, plus 3.75% and (iv) added an additional 16 of our owned locations to the collateral pool securing the Term Loan. The amended and restated Term Loan was deemed to be substantially different than the prior Term Loan, and therefore the modification of the debt was treated as a debt extinguishment.

        Net proceeds from the amended and restated Term Loan together with cash on hand were used to settle the outstanding interest rate swap on the Term Loan as structured prior to its amendment and restatement and to satisfy and discharge all of our outstanding 7.5% Senior Subordinated Notes ("Notes") due 2014. The settlement of the interest rate swap resulted in the reclassification of $7.5 million of accumulated other comprehensive loss to interest expense. We recognized, in interest expense, $1.9 million of deferred financing costs related to the Notes and the Term Loan as structured prior to its amendment and restatement. The interest payment and the swap settlement payment are presented within cash flows from operations on the consolidated statement of cash flows.

        On November 12, 2013, the Company entered into the First Amendment to the Second Amended and Restated Credit Agreement. The First Amendment reduced the interest rate payable by the Company from (i) LIBOR, subject to a 1.25% floor, plus 3.75% to (ii) LIBOR, subject to a 1.25% floor, plus 3.00%. The reduction in the interest rate lowered interest expense by approximately $1.5 million in annualized interest savings.

        As of January 31, 2015, 141 stores collateralized the Term Loan. The amount outstanding under the Term Loan as of January 31, 2015 and February 1, 2014 was $196.0 million and $198.0 million, respectively.

    Revolving Credit Agreement, Through July 2016

        On January 16, 2009 we entered into the Revolving Credit Agreement among the Company, Bank of America, N.A., as Administrative Agent, and the other parties thereto providing for borrowings of up to $300.0 million and having a maturity of January 2014. Total incurred fees of $6.8 million were capitalized and are being amortized over the original five year life of the facility. On July 26, 2011, we amended and restated the Revolving Credit Agreement to reduce its interest rate by 75 basis points and to extend its maturity to July 2016. Our 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 facility is LIBOR plus a margin of 2.00% to 2.50% for LIBOR rate borrowings or Prime plus 1.00% to 1.50% for Prime rate borrowings. The margin is based upon the then current availability under the facility. As of January 31, 2015, we had $17.0 million in borrowings outstanding under the facility and $35.1 million of availability was utilized to support outstanding letters of credit. Taking this into account and the borrowing base requirements (including reduction for amount outstanding under the trade payable program), as of January 31, 2015 there was $138.4 million of availability remaining under the facility.

    Other Matters

        Our debt agreements require compliance with covenants. The most restrictive of these covenants, an earnings before interest, taxes, depreciation and amortization ("EBITDA") requirement, is triggered if the availability under our Revolving Credit Agreement plus unrestricted cash drops below $50.0 million. As of January 31, 2015, we were in compliance with all financial covenants contained in our debt agreements.

        The weighted average interest rate on all debt borrowings during fiscal 2014 and 2013 was 4.1% and 4.9%, respectively.

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    Other Contractual Obligations

        We have a trade payable program which is funded by various bank participants who have the ability, but not the obligation, to purchase account receivables owed by us directly from our suppliers. In fiscal 2013, we increased the total availability under the program from $175.0 million to $200.0 million. There was an outstanding balance of $140.9 million and $129.8 million under this program as of January 31, 2015 and February 1, 2014, respectively.

        We have letter of credit arrangements in connection with our risk management and import merchandising programs. We had $8.1 million and $13.9 million of outstanding commercial letters of credit as of February 1, 2014 and February 2, 2013, respectively. We were contingently liable for $27.0 million and $30.9 million in outstanding standby letters of credit as of January 31, 2015 and February 1, 2014, respectively.

        We are also contingently liable for surety bonds in the amount of approximately $12.8 million and $10.6 million as of January 31, 2015 and February 1, 2014, respectively. The surety bonds guarantee certain of our payments (for example utilities, easement repairs, licensing requirements and customs fees).

    Off-balance Sheet Arrangements

        We lease certain property and equipment under operating leases and lease financings which contain renewal and escalation clauses, step rent provisions, capital improvements funding and other lease concessions. These provisions are considered in the calculation of our minimum lease payments which are recognized as expense on a straight-line basis over the applicable lease term. Any lease payments that are based upon an existing index or rate are included in our minimum lease payment calculations. Total operating lease commitments as of January 31, 2015 were $746.2 million.

    Pension and Retirement Plans

        On January 31, 2014, we amended our non-qualified Supplemental Executive Retirement Plan (the Account Plan") to eliminate the retirement plan contributions that have historically been made by the Company effective for calendar year 2015. We did not make any contributions to the Account Plan in fiscal 2014 and our contribution expense for fiscal 2013 and 2012 was $0.8 million and $0.1 million, respectively.

        We have a qualified 401(k) savings plan and a separate savings plan for employees residing in Puerto Rico, which cover all full-time employees who are at least 18 years of age and have completed the lesser of (i) six consecutive months of employment and having a minimum of 500 hours of service and (ii) 12 consecutive months and having a minimum of 1,000 hours of service. We contribute the lesser of 50% of the first 6% of a participant's contributions or 3% of the participant's compensation under both savings plans. For fiscal 2012, our contributions were conditional upon the achievement of certain pre-established financial performance goals which were not met in fiscal 2012. Employer contributions for fiscal 2013 and fiscal 2014 were not conditional on any financial performance goals. Our savings plans' contribution expense was $3.2 million and $3.5 million in fiscal 2014 and fiscal 2013 respectively. There was no contribution expense for fiscal 2012.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

        Management's Discussion and Analysis of Financial Condition and Results of Operations discusses our 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, the disclosure of contingent assets and liabilities at the date of the consolidated

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financial statements and the amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to customer incentives, product returns and warranty obligations, bad debts, inventories, income taxes, financing operations, retirement benefits, share-based compensation, risk participation agreements, contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed 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.

        We believe that the following represent our more critical estimates and assumptions used in the preparation of the consolidated financial statements:

    Inventory is stated at lower of cost, as determined under the last-in, first-out (LIFO) method, or market. Our inventory, which consists primarily of automotive parts and accessories, is used on vehicles. Because of the relatively long lives of vehicles, along with our historical experience of returning most excess inventory to our suppliers for full credit, the risk of obsolescence is minimal. We establish a reserve for excess inventory for instances where less than full credit will be received for such returns and where we anticipate items will be sold at retail prices that are less than recorded costs. The reserve is based on management's judgment, including estimates and assumptions regarding marketability of products, the market value of inventory to be sold in future periods and on historical experiences where we received less than full credit from suppliers for product returns. If our estimates regarding excess inventory are inaccurate, we may incur losses or gains that could be material. A 10% difference in our inventory reserves as of January 31, 2015 would have affected net earnings by approximately $0.5 million in fiscal 2014.

    We receive various payments and allowances from our vendors through a variety of programs and arrangements, including allowances for warranties, advertising and general promotion of vendor products. Vendor allowances are treated as a reduction of inventory, unless they are provided as a reimbursement of specific, incremental, identifiable costs incurred by the Company in selling the vendor's products. The vast majority of the vendor funds received are recorded as a reduction of the cost of inventories and recognized as a reduction to cost of sales as these inventories are sold.

      Based on our vendor agreements, a significant portion of vendor funding we receive is based on our inventory purchases. Therefore, we record receivables for funding earned but not yet received as we purchase inventory. During the year, we regularly review the receivables from vendors to ensure vendors are able to meet their obligations. We generally have not recorded a reserve against these receivables as we have legal right of offset with our vendors for payments owed them. Historically, we have had immaterial write-offs in each of the last three years.

    We record reserves for future sales returns, customer incentives, warranty claims and inventory shrinkage. The reserves are based on expected returns of products and historical claims and inventory shrinkage experience. If actual experience differs from historical levels, revisions in our estimates may be required. A 10% change in these reserves at January 31, 2015 would have affected net earnings by approximately $0.6 million for fiscal 2014.

    We have risk participation arrangements with respect to workers' compensation, general liability, automobile liability and other casualty coverage, including stop loss coverage with third party insurers to limit our total exposure. A reserve for the liabilities associated with these agreements is established using generally accepted actuarial methods followed in the insurance industry and our historical claims experience. The amounts included in our costs related to these arrangements are estimated and can vary based on changes in assumptions, claims experience or the providers included in the associated insurance programs. A 10% change in our self-insurance

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      liabilities at January 31, 2015 would have affected net earnings by approximately $6.0 million for fiscal 2014.

    We have goodwill recorded as the result of acquisitions. We review goodwill for impairment annually during the fourth quarter, or when events or changes in circumstances indicate the carrying value of these reporting units might exceed their current fair values. The goodwill impairment test includes a quantitative assessment, which compares the fair value of the reporting unit to the carrying amount, including goodwill. At fiscal year end 2014, we had eight reporting units, of which six included goodwill. (see Note 12 to the Consolidated Financial Statements for assessment and testing).

    We periodically evaluate our long-lived assets for indicators of impairment. Management's judgments, including judgments related to store cash flows, are based on market and operating conditions at the time of evaluation. Future events could cause management's conclusion on impairment to change, requiring an adjustment of these assets to their then current fair market value.

    We are required to estimate our income taxes in each of the jurisdictions in which we operate. This requires us to estimate our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as depreciation of property and equipment and valuation of inventories, for tax and accounting purposes. We determine our provision for income taxes based on federal and state tax laws and regulations currently in effect. Legislation changes currently proposed by certain states in which we operate, if enacted, could increase our transactions or activities subject to tax. Any such legislation that becomes law could result in an increase in our state income tax expense and our state income taxes paid, which could have a material effect on our net earnings.

      At any one time our tax returns for many tax years are subject to examination by U.S. Federal, commonwealth, and state taxing jurisdictions. 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. An uncertain income tax position will not be recognized in the financial statements unless it is more-likely-than-not to be sustained. We adjust these tax liabilities, as well as the related interest and penalties, based on the latest facts and circumstances, including recently published rulings, court cases, and outcomes of tax audits. To the extent our actual tax liability differs from our established tax liabilities for unrecognized tax benefits, our effective tax rate may be materially impacted. While it is often difficult to predict the final outcome of, the timing of, or the tax treatment of any particular tax position or deduction, we believe that our tax balances reflect the more-likely-than-not outcome of known tax contingencies.

      The temporary differences between the book and tax treatment of income and expenses result in deferred tax assets and liabilities, which are included within our consolidated balance sheets. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income. To the extent we believe that recovery is not more-likely-than-not, we must establish a valuation allowance. To the extent we establish a valuation allowance or change the allowance in a future period, income tax expense will be impacted. Actual results could differ from this assessment if adequate taxable income is not generated in future periods from either operations or projected tax planning strategies.

RECENT ACCOUNTING STANDARDS

        In August 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") No. 2014-15, "Presentation of Financial Statements—Going Concern: Disclosure of

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Uncertainties about an Entity's Ability to Continue as a Going Concern." This new standard requires management to perform interim and annual assessments of an entity's ability to continue as a going concern within one year of the date the financial statements are issued. An entity must provide certain disclosures if conditions or events raise substantial doubt about the entity's ability to continue as a going concern. This ASU is effective for annual periods ending after December 15, 2016, and interim periods thereafter; earlier adoption is permitted. The Company does not expect the adoption of ASU 2014-15 to have a material impact on the consolidated financial statements.

        In June 2014, the FASB issued ASU No. 2014-12, "Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period", which is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015 with early adoption permitted. The Company is currently evaluating the new standard, but does not expect adoption of ASU 2014-12 to have a material impact on our consolidated financial statements.

        In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers." ASU 2014-09 supersedes the revenue recognition requirements in "Topic 605, Revenue Recognition" and requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 is effective retrospectively for annual or interim reporting periods beginning after December 15, 2016, with early adoption not permitted. The Company is currently evaluating the new standard, but does not expect the adoption of ASU 2014-09 to have a material impact on the consolidated financial statements.

        In April 2014, the FASB issued ASU No. 2014-08, "Reporting of Discontinued Operations and Disclosures of Disposals of Components of an Entity." ASU 2014-08 provides a narrower definition of discontinued operations than under existing U.S. GAAP. ASU 2014-08 requires that only a disposal of a component of an entity, or a group of components of an entity, that represents a strategic shift that has, or will have, a major effect on the reporting entity's operations and financial results should be reported in the financial statements as discontinued operations. ASU 2014-08 also provides guidance on the financial statement presentations and disclosures of discontinued operations. ASU 2014-08 is effective prospectively for disposals (or classifications as held for disposal) of components of an entity that occur in annual or interim periods beginning after December 15, 2014. The Company does not expect the adoption of ASU 2014-08 to have a material impact on the consolidated financial statements.

        In July 2013, the FASB issued ASU No. 2013-11, "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists". ASU 2013-11 states that an unrecognized tax benefit should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward or a tax credit carryforward, if available at the reporting date under the applicable tax law to settle any additional income taxes that would result from the disallowance of a tax position. If the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The adoption of ASU 2013-11 did not have a material impact on the Company's consolidated financial statements.

ITEM 7A    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        We have market rate exposure in our financial instruments due to changes in interest rates and prices.

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Variable and Fixed Rate Debt

        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 daily LIBOR could affect the rates at which we could borrow funds thereunder. At January 31, 2015, there was $17.0 million in outstanding borrowings under the agreement. Additionally, we have a $200.0 million Term Loan that bears an interest rate payable by the Company of LIBOR, subject to a 1.25% floor, plus 3.00%. Excluding our interest rate swap, a one percent change in the LIBOR rate would have affected net earnings by approximately $1.9 million for fiscal 2014. The risks related to changes in the LIBOR rate are substantially mitigated by our interest rate swap.

        The fair value of our long-term debt including current maturities was $211.0 million at January 31, 2015. We determine fair value on our fixed rate debt by using quoted market prices and current interest rates.

Interest Rate Swaps

        On October 11, 2012, we settled our interest rate swap designated as a cash flow hedge on $145.0 million of our Term Loan prior to its amendment and restatement. The swap was used to minimize interest rate exposure and overall interest costs by converting the variable component of the total interest rate to a fixed rate of 5.04%. 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 settlement of this swap resulted in an interest charge of $7.5 million, which was previously recorded within accumulated other comprehensive loss.

        On October 11, 2012, we entered into two new interest rate swaps for a notional amount of $50.0 million each that together are designated as a cash flow hedge on the first $100.0 million of the amended and restated Term Loan. The interest rate swaps convert the variable LIBOR portion of the interest payments, subject to a floor of 1.25%, due on the first $100.0 million of the Term Loan to a fixed rate of 1.86%.

        As of January 31, 2015 and February 1, 2014, the fair value of the new interest rate swaps was a net $0.6 million liability and a $0.6 million asset, respectively. The swap value is recorded within other long-term assets or other long-term liabilities on the balance sheet.

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ITEM 8    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
The Pep Boys—Manny, Moe & Jack
Philadelphia, Pennsylvania

        We have audited the accompanying consolidated balance sheets of The Pep Boys—Manny, Moe & Jack and subsidiaries (the "Company") as of January 31, 2015 and February 1, 2014, and the related consolidated statements of operations and comprehensive (loss) income, stockholders' equity, and cash flows for each of the three fiscal years in the period ended January 31, 2015. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.

        We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of The Pep Boys—Manny, Moe & Jack and subsidiaries as of January 31, 2015 and February 1, 2014, and the results of their operations and their cash flows for each of the three fiscal years in the period ended January 31, 2015, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

        We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of January 31, 2015, based on the criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated April 15, 2015 expressed an unqualified opinion on the Company's internal control over financial reporting.

/s/ Deloitte & Touche LLP

Philadelphia, Pennsylvania
April 15, 2015

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THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(dollar amounts in thousands, except share data)

 
  January 31,
2015
  February 1,
2014
 

ASSETS

             

Current assets:

             

Cash and cash equivalents

  $ 38,044   $ 33,431  

Accounts receivable, less allowance for uncollectible accounts of $1,604 and $1,320

    31,013     25,152  

Merchandise inventories

    656,957     672,354  

Prepaid expenses

    27,952     29,282  

Other current assets

    55,986     63,405  

Assets held for disposal

    2,648     2,013  

Total current assets

    812,600     825,637  

Property and equipment—net of accumulated depreciation of $1,251,797 and $1,227,121

    604,380     625,525  

Goodwill

    32,869     56,794  

Deferred income taxes

    56,571     57,686  

Other long-term assets

    35,321     39,839  

Total assets

  $ 1,541,741   $ 1,605,481  

LIABILITIES AND STOCKHOLDERS' EQUITY

             

Current liabilities:

             

Accounts payable

  $ 227,132   $ 256,031  

Trade payable program liability

    140,904     129,801  

Accrued expenses

    226,176     237,403  

Deferred income taxes

    61,216     69,373  

Current maturities of long-term debt

    2,000     2,000  

Total current liabilities

    657,428     694,608  

Long-term debt less current maturities

    211,000     199,500  

Other long-term liabilities

    45,567     48,485  

Deferred gain from asset sales

    103,596     114,823  

Commitments and contingencies

             

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

    298,299     297,009  

Retained earnings

    397,890     432,332  

Accumulated other comprehensive (loss) income

    (391 )   379  

Treasury stock, at cost—14,988,205 shares and 15,358,872 shares

    (240,205 )   (250,212 )

Total stockholders' equity

    524,150     548,065  

Total liabilities and stockholders' equity

  $ 1,541,741   $ 1,605,481  

   

See notes to the consolidated financial statements.

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THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME

(dollar amounts in thousands, except per share data)

Year ended
  January 31, 2015
(52 weeks)
  February 1, 2014
(52 weeks)
  February 2, 2013
(53 weeks)
 

Merchandise sales

  $ 1,593,883   $ 1,608,697   $ 1,643,948  

Service revenue

    490,720     457,871     446,782  

Total revenues

    2,084,603     2,066,568     2,090,730  

Costs of merchandise sales

    1,124,755     1,108,359     1,159,994  

Costs of service revenue

    484,404     470,832     439,236  

Total costs of revenues

    1,609,159     1,579,191     1,599,230  

Gross profit from merchandise sales

    469,128     500,338     483,954  

Gross profit (loss) from service revenue

    6,316     (12,961 )   7,546  

Total gross profit

    475,444     487,377     491,500  

Selling, general and administrative expenses

    484,182     464,852     463,416  

Goodwill impairment

    23,925          

Pension settlement expense

            17,753  

Net (gain) loss from disposition of assets

    (13,806 )   227     (1,323 )

Operating (loss) profit

    (18,857 )   22,298     11,654  

Merger termination fees, net

            42,816  

Non-operating income

    1,188     1,789     2,012  

Interest expense

    (13,873 )   (14,797 )   (33,982 )

(Loss) earnings from continuing operations before income taxes and discontinued operations

    (31,542 )   9,290     22,500  

Income tax (benefit) expense

    (4,581 )   2,237     9,345  

(Loss) earnings from continuing operations before discontinued operations

    (26,961 )   7,053     13,155  

Loss from discontinued operations, net of tax benefit of $179, $102 and $186

    (332 )   (188 )   (345 )

Net (loss) earnings

    (27,293 )   6,865     12,810  

Basic (loss) earnings per share:

                   

(Loss) earnings from continuing operations before discontinued operations

  $ (0.50 ) $ 0.13   $ 0.25  

Loss from discontinued operations, net of tax

    (0.01 )       (0.01 )

Basic (loss) earnings per share

  $ (0.51 ) $ 0.13   $ 0.24  

Diluted (loss) earnings per share:

                   

(Loss) earnings from continuing operations before discontinued operations

  $ (0.50 ) $ 0.13   $ 0.24  

Loss from discontinued operations, net of tax

    (0.01 )        

Diluted (loss) earnings per share

  $ (0.51 ) $ 0.13   $ 0.24  

Other comprehensive (loss) income:

                   

Defined benefit plan adjustment, net of tax

            9,696  

Derivative financial instrument adjustment, net of tax

    (770 )   1,359     6,973  

Other comprehensive (loss) income

    (770 )   1,359     16,669  

Total comprehensive (loss) income

  $ (28,063 ) $ 8,224   $ 29,479  

   

See notes to the consolidated financial statements.

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THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(dollar amounts in thousands, except share data)

 
  Common Stock    
   
  Treasury Stock   Accumulated
Other
Comprehensive
(Loss)/Income
   
 
 
  Additional
Paid-in
Capital
  Retained
Earnings
  Total
Stockholders'
Equity
 
 
  Shares   Amount   Shares   Amount  

Balance, January 28, 2012

    68,557,041   $ 68,557   $ 296,462   $ 423,437     (15,803,322 ) $ (266,478 ) $ (17,649 ) $ 504,329  

Comprehensive income:

                                                 

Net earnings

                      12,810                       12,810  

Changes in net unrecognized other postretirement benefit costs, net of tax of $5,729

                                        9,696     9,696  

Fair market value adjustment on derivatives, net of tax of $4,208

                                        6,973     6,973  

Total comprehensive income

                                              29,479  

Effect of stock options and related tax benefits

                375     (5,494 )   274,769     7,418           2,299  

Effect of employee stock purchase plan

                      (605 )   39,552     1,067           462  

Effect of restricted stock unit conversions

                (2,457 )         92,703     2,503           46  

Stock compensation expense

                1,299                             1,299  

Treasury stock repurchases

                            (35,000 )   (342 )         (342 )

Balance, February 2, 2013

    68,557,041   $ 68,557   $ 295,679   $ 430,148     (15,431,298 ) $ (255,832 ) $ (980 ) $ 537,572  

Comprehensive income:

                                                 

Net earnings

                      6,865                       6,865  

Fair market value adjustment on derivatives, net of tax of $814

                                        1,359     1,359  

Total comprehensive income

                                              8,224  

Effect of stock options and related tax benefits

                (135 )   (3,742 )   188,652     5,093           1,216  

Effect of employee stock purchase plan

                      (939 )   62,547     1,688           749  

Effect of restricted stock unit conversions

                (1,527 )         58,851     1,589           62  

Stock compensation expense

                2,992                             2,992  

Treasury stock repurchases

                            (237,624 )   (2,750 )         (2,750 )

Balance, February 1, 2014

    68,557,041   $ 68,557   $ 297,009   $ 432,332     (15,358,872 ) $ (250,212 ) $ 379   $ 548,065  

Comprehensive income:

                                                 

Net loss

                      (27,293 )                     (27,293 )

Fair market value adjustment on derivatives, net of tax benefit of $460

                                        (770 )   (770 )

Total comprehensive loss

                                              (28,063 )

Effect of stock options and related tax benefits

                (8 )   (5,933 )   255,023     6,886           945  

Effect of employee stock purchase plan

                      (1,216 )   73,058     1,972           756  

Effect of restricted stock unit conversions

                (959 )         42,586     1,149           190  

Stock compensation expense

                2,257                             2,257  

Balance, January 31, 2015

    68,557,041   $ 68,557   $ 298,299   $ 397,890     (14,988,205 ) $ (240,205 ) $ (391 ) $ 524,150  

   

See notes to the consolidated financial statements.

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THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollar amounts in thousands)

 
  Year Ended  
 
  January 31,
2015
  February 1,
2014
  February 2,
2013
 

Cash flows from operating activities:

                   

Net (loss) earnings

  $ (27,293 ) $ 6,865   $ 12,810  

Adjustments to reconcile net (loss) earnings to net cash provided by continuing operations:

                   

Net loss from discontinued operations

    332     188     345  

Depreciation

    75,099     78,439     79,104  

Amortization of deferred gain from asset sales

    (13,389 )   (12,604 )   (12,846 )

Amortization of deferred financing costs

    2,563     2,993     4,431  

Stock compensation expense

    2,257     2,992     1,299  

Deferred income taxes

    (6,588 )   (79 )   7,576  

Net (gain) loss from dispositions of assets

    (13,806 )   227     (1,323 )

Asset impairment

    7,535     7,659     10,555  

Goodwill impairment

    23,925          

Other

    (139 )   (493 )   (269 )

Changes in operating assets and liabilities, net of the effects of acquisitions:

                   

Decrease (increase) in accounts receivable, prepaid expenses and other

    4,366     (6,511 )   (602 )

Decrease (increase) in merchandise inventories

    15,397     (31,146 )   (27,074 )

(Decrease) increase in accounts payable

    (27,963 )   8,378     984  

(Decrease) increase in accrued expenses

    (11,853 )   6,115     10,481  

(Decrease) increase in other long-term liabilities

    (2,391 )   (3,345 )   3,487  

Net cash provided by continuing operations

    28,052     59,678     88,958  

Net cash used in discontinued operations

    (608 )   (274 )   (467 )

Net cash provided by operating activities

    27,444     59,404     88,491  

Cash flows from investing activities:

                   

Capital expenditures

    (67,269 )   (53,982 )   (54,696 )

Proceeds from dispositions of assets

    20,227     21     5,588  

Additions to collateral investment

        (2,312 )   (3,654 )

Release of collateral investment

        1,650      

Acquisitions, net of cash acquired

        (10,694 )    

Net cash used in investing activities

    (47,042 )   (65,317 )   (52,762 )

Cash flows from financing activities:

                   

Borrowings under line of credit agreements

    598,495     40,745     2,319  

Payments under line of credit agreements

    (584,995 )   (37,245 )   (2,319 )

Borrowings on trade payable program liability

    182,462     154,985     179,751  

Payments on trade payable program liability

    (171,359 )   (174,902 )   (115,247 )

Payments for finance issuance costs

        (770 )   (6,520 )

Borrowings under new debt

            200,000  

Debt payments

    (2,000 )   (2,000 )   (295,122 )

Repurchase of common stock

        (2,750 )   (342 )

Proceeds from stock issuance

    1,608     2,095     2,693  

Net cash provided by (used in) financing activities

    24,211     (19,842 )   (34,787 )

Net increase (decrease) in cash and cash equivalents

    4,613     (25,755 )   942  

Cash and cash equivalents at beginning of year

    33,431     59,186     58,244  

Cash and cash equivalents at end of year

  $ 38,044   $ 33,431   $ 59,186  

Supplemental cash flow information:

                   

Cash paid for interest, net of amounts capitalized

  $ 11,377   $ 12,027   $ 31,290  

Cash received from income tax refunds

    292     1,251     108  

Cash paid for income taxes

    1,418     4,377     2,826  

Non-cash investing activities:

                   

Accrued purchases of property and equipment

    3,346     3,467     1,371  

   

See notes to the consolidated financial statements.

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THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended January 31, 2015, February 1, 2014 and February 2, 2013

NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

        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.

        The Company believes the significant accounting policies described below affect the more significant judgments and estimates used in the preparation of its consolidated financial statements. Accordingly, these are the policies the Company believes are the most critical to aid in fully understanding and evaluating the historical consolidated financial condition and results of operations.

        BUSINESS    The Company operates in the U.S. automotive aftermarket, which has two general lines of business: (1) the Service business, commonly known as Do-It-For-Me, or "DIFM" (service labor, installed merchandise and tires) and (2) the Retail business, commonly known as Do-It-Yourself, or "DIY" (retail merchandise) and commercial. The Company's primary store format is the Supercenter, which serves both "DIFM" and "DIY" customers with the highest quality service offerings and merchandise. As part of the Company's long-term strategy to lead with automotive service, the Company is complementing the existing Supercenter store base with Service & Tire Centers. These Service & Tire Centers are designed to capture market share and leverage the existing Supercenter and support infrastructure. The Company currently operates stores in 35 states and Puerto Rico.

        FISCAL YEAR END    The Company's fiscal year ends on the Saturday nearest to January 31. Fiscal 2014 and Fiscal 2013, which ended January 31, 2015 and February 2, 2014, respectively, were comprised of 52 weeks. Fiscal 2012, which ended February 2, 2013, was comprised of 53 weeks.

        PRINCIPLES OF CONSOLIDATION    The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated.

        CASH AND CASH EQUIVALENTS    Cash equivalents include all short-term, highly liquid investments with an initial maturity of three months or less when purchased. All credit and debit card transactions that settle in less than seven days are also classified as cash and cash equivalents.

        ACCOUNTS RECEIVABLE    Accounts receivable are primarily comprised of amounts due from commercial customers. The Company records an allowance for doubtful accounts based on an evaluation of the credit worthiness of its customers. The allowance is reviewed for adequacy at least quarterly and adjusted as necessary. Specific accounts are written off against the allowance when management determines the account is uncollectible.

        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. If the first-in, first-out (FIFO)

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THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years ended January 31, 2015, February 1, 2014 and February 2, 2013

NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

method of costing inventory had been used by the Company, inventory would have been $570.2 million and $579.8 million as of January 31, 2015 and February 1, 2014, respectively. During fiscal 2014, 2013 and 2012, the effect of LIFO layer liquidations on gross profit was immaterial.

        The Company's inventory, consisting primarily of automotive tires, parts, and accessories, is used on vehicles typically having long lives. Because of this, and combined with the Company's historical experience of returning excess inventory to the Company's suppliers for full credit, the risk of obsolescence is minimal. The Company establishes a reserve for excess inventory for instances where less than full credit will be received for such returns or where the Company anticipates items will be sold at retail prices that are less than recorded costs. The reserve is based on management's judgment, including estimates and assumptions regarding marketability of products, the market value of inventory to be sold in future periods and on historical experiences where the Company received less than full credit from suppliers for product returns. The Company also provides for estimated inventory shrinkage based on historical levels and the results of its cycle counting program. The Company's inventory adjustments for these matters were immaterial for fiscal 2014 and fiscal 2013. In future periods, the company may be exposed to material losses should the company's suppliers alter their policies with regard to accepting excess inventory returns.

        PROPERTY AND EQUIPMENT    Property and equipment are recorded at cost. Depreciation and amortization are computed using the straight-line method over the following estimated useful lives: building and improvements, 5 to 40 years, and furniture, fixtures and equipment, 3 to 10 years. Maintenance and repairs are charged to expense as incurred. Upon retirement or sale, the cost and accumulated depreciation are eliminated and the gain or loss, if any, is included in the determination of net income. Property and equipment information follows:

(dollar amounts in thousands)
  January 31,
2015
  February 1,
2014
 

Land

  $ 200,235   $ 202,038  

Buildings and improvements

    895,214     888,389  

Furniture, fixtures and equipment

    759,008     760,170  

Construction in progress

    1,720     2,049  

Accumulated depreciation

    (1,251,797 )   (1,227,121 )

Property and equipment—net

  $ 604,380   $ 625,525  

        GOODWILL    The accompanying Consolidated Balance Sheet has goodwill recorded as the result of acquisitions. The Company reviews goodwill for impairment annually during the fourth quarter, or when events or changes in circumstances indicate the carrying value of these reporting units might exceed their current fair values. The goodwill impairment test includes a quantitative assessment, which compares the fair value of the reporting unit to the carrying amount, including goodwill. At fiscal year end 2014, the Company had eight reporting units, of which six included goodwill. See Note 12 "Goodwill" for assessment and testing.

        OTHER INTANGIBLE ASSETS    The Company amortizes intangible assets with finite lives on a straight-line basis over their estimated useful lives.

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THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years ended January 31, 2015, February 1, 2014 and February 2, 2013

NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

        LEASES    The Company amortizes leasehold improvements over the lesser of the lease term or the economic life of those assets. Generally, for stores the lease term is the base lease term and for distribution centers the lease term includes the base lease term plus certain renewal option periods for which renewal is reasonably assured and for which failure to exercise the renewal option would result in an economic penalty to the Company. The calculation of straight-line rent expense is based on the same lease term with consideration for step rent provisions, escalation clauses, rent holidays and other lease concessions. The Company begins expensing rent upon completion of the Company's due diligence or when the Company has the right to use the property, whichever comes earlier.

        SOFTWARE CAPITALIZATION    The Company capitalizes certain direct development costs associated with internal-use software, including external direct costs of material and services, and payroll costs for employees devoting time to the software projects. These costs are amortized over a period not to exceed five years beginning when the asset is substantially ready for use. Costs incurred during the preliminary project stage, as well as maintenance and training costs are expensed as incurred.

        TRADE PAYABLE PROGRAM LIABILITY    The Company has a trade payable program which is funded by various bank participants who have the ability, but not the obligation, to purchase account receivables owed by the Company directly from its suppliers. The Company, in turn, makes the regularly scheduled full supplier payments to the bank participants.

        INCOME TAXES    The Company uses the asset and liability method of accounting for income taxes. Deferred income taxes are determined based upon enacted tax laws and rates applied to the differences between the financial statement and tax bases of assets and liabilities.

        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. To the extent the Company establishes a valuation allowance or changes the allowance in a future period, income tax expense will be impacted.

        In evaluating income tax positions, the Company records liabilities for potential exposures. These tax liabilities are adjusted in the period actual developments give rise to such change. Those developments could be, but are not limited to, settlement of tax audits, expiration of the statute of limitations, and changes in the tax code and regulations, along with varying application of tax policy and administration within those jurisdictions. Refer to Note 8, "Income Taxes," for further discussion of income taxes and changes in unrecognized tax benefit.

        SALES TAXES    The Company presents sales net of sales taxes in its consolidated statements of operations.

        REVENUE RECOGNITION    The Company recognizes revenue from the sale of merchandise at the time the merchandise is sold and the product is delivered to the customer, net of an allowance for estimated future returns. Service revenues are recognized on completion of the service. Service revenue consists of the labor charged for installing merchandise or maintaining or repairing vehicles, excluding

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THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years ended January 31, 2015, February 1, 2014 and February 2, 2013

NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

the sale of any installed parts or materials. The Company records revenue net of an allowance for estimated future returns. The Company establishes reserves for sales returns and allowances based on current sales levels and historical return rates. Revenue from gift card sales is recognized on gift card redemption. The Company's gift cards do not have expiration dates. The Company recognizes breakage on gift cards when, among other things, sufficient gift card history is available to estimate potential breakage and the Company determines there are no legal obligations to remit the value of unredeemed gift cards to the relevant jurisdictions. Estimated gift card breakage revenue is immaterial for all periods presented.

        The Company's Customer Loyalty program allows members to earn points for each qualifying purchase. Points earned allow members to receive a certificate that may be redeemed on future purchases within 90 days of issuance. The retail value of points earned by loyalty program members is included in accrued liabilities as deferred income and recorded as a reduction of revenue at the time the points are earned, based on the historic and projected rate of redemption. The Company recognizes deferred revenue and the cost of the free products distributed to loyalty program members when the awards are redeemed. The cost of the free products distributed to program members is recorded within costs of revenues.

        A portion of the Company's transactions includes the sale of auto parts that contain a core component. These components represent the recyclable portion of the auto part. Customers are not charged for the core component of the new part if a used core is returned at the point of sale of the new part; otherwise the Company charges customers a specified amount for the core component. The Company refunds that same amount if the customer returns a used core to the store at a later date. The Company does not recognize sales or cost of sales for the core component of these transactions when a used part is returned by the customer at the point of sale.

        COSTS OF REVENUES    Costs of merchandise sales include the cost of products sold, buying, warehousing and store occupancy costs. Costs of service revenue include service center payroll and related employee benefits, service center occupancy costs and cost of providing free or discounted towing services to customers. Occupancy costs include utilities, rents, real estate and property taxes, repairs, maintenance, depreciation and amortization expenses.

        VENDOR SUPPORT FUNDS    The Company receives various incentives in the form of discounts and allowances from its suppliers based on purchases or for services that the Company provides to the suppliers. These incentives received from suppliers include rebates, allowances and promotional funds and are generally based on a percentage of the gross amount purchased. Funds are recorded when title of goods purchased have transferred to the Company as the amount is known and not contingent on future events. The amount of funds to be received are subject to supplier agreements and ongoing negotiations that may be impacted in the future based on changes in market conditions, supplier marketing strategies and changes in the profitability or sell-through of the related merchandise for the Company.

        Generally vendor support funds are earned based on purchases or product sales. These incentives are treated as a reduction of inventories and are recognized as a reduction to cost of sales as the inventories are sold. Certain supplier allowances are used exclusively for promotions and to offset certain other direct expenses if the Company determines the allowances are for specific, identifiable

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THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years ended January 31, 2015, February 1, 2014 and February 2, 2013

NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

incremental expenses. Vendor support funds used to offset direct advertising costs were immaterial for fiscal years 2014, 2013, and 2012.

        WARRANTY RESERVE    The Company provides warranties for both its merchandise sales and service labor. Warranties for merchandise are generally covered by the respective suppliers with the Company covering any costs above the supplier's stipulated allowance. Service labor is warranted in full by the Company for a limited specific time period. The Company establishes its warranty reserves based on historical experience. These costs are included in either costs of merchandise sales or costs of service revenue in the consolidated statement of operations.

        The reserve for warranty activity for the years ended January 31, 2015 and February 1, 2014, respectively, are as follows:

(dollar amounts in thousands)
   
 

Balance, February 2, 2013

  $ 864  

Additions related to sales in the current year

    13,748  

Warranty costs incurred in the current year

    (13,930 )

Balance, February 1, 2014

    682  

Additions related to sales in the current year

    14,435  

Warranty costs incurred in the current year

    (14,435 )

Balance, January 31, 2015

  $ 682  

        ADVERTISING    The Company expenses the costs of advertising the first time the advertising takes place. Gross advertising expense for fiscal 2014, 2013 and 2012 was $71.4 million, $65.8 million and $66.3 million, respectively, and is recorded within selling, general and administrative expenses. No advertising costs were recorded as assets as of January 31, 2015 or February 1, 2014.

        STORE OPENING COSTS    The costs of opening new stores are expensed as incurred.

        IMPAIRMENT OF LONG-LIVED ASSETS    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 to be disposed of at the lower of the carrying amount or the fair market value less selling costs. See discussion of current year impairments in Note 11, "Store Closures and Asset Impairments."

        EARNINGS PER SHARE    Basic earnings per share are computed by dividing earnings by the weighted average number of common shares outstanding during the year. Diluted earnings per share are computed by dividing earnings by the weighted average number of common shares outstanding during the year plus incremental shares that would have been outstanding upon the assumed exercise of dilutive stock based compensation awards.

        DISCONTINUED OPERATIONS    The Company's discontinued operations reflect the operating results for closed stores where the customer base could not be maintained. Loss from discontinued operations relates to expenses for previously closed stores and principally includes costs for rent, taxes, payroll, repairs and maintenance, asset impairments, and gains or losses on disposal.

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THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years ended January 31, 2015, February 1, 2014 and February 2, 2013

NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

        ACCOUNTING FOR STOCK-BASED COMPENSATION    At January 31, 2015, the Company has two stock-based employee compensation plans, which are described in Note 15, "Equity Compensation Plans." Compensation costs relating to share-based payment transactions are recognized in the financial statements. The cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the employee's requisite service period (generally the vesting period of the equity award).

        COMPREHENSIVE INCOME    Other comprehensive income includes changes in the fair market value of cash flow hedges.

        DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES    The Company may enter into interest rate swap agreements to hedge the exposure to increasing rates with respect to its certain variable rate debt agreements. The Company recognizes all derivatives as either assets or liabilities in the statement of financial position and measures those instruments at fair value. See further discussion in Note 5, "Debt and Financing Arrangements."

        SEGMENT INFORMATION    The Company has eight operating segments defined by geographic regions. Each segment serves both DIY and DIFM lines of business. The Company aggregates all of its operating segments into one reportable segment. Sales by major product categories are as follows:

 
  52 weeks ended   52 weeks ended   53 weeks ended  
(dollar amounts in thousands)
  January 31, 2015   February 1, 2014   February 2, 2013  

Parts and accessories

  $ 1,217,520   $ 1,238,384   $ 1,252,617  

Tires

    376,363     370,313     391,331  

Service labor

    490,720     457,871     446,782  

Total revenues

  $ 2,084,603   $ 2,066,568   $ 2,090,730  

        SIGNIFICANT SUPPLIERS    During fiscal 2014, the Company's ten largest suppliers accounted for approximately 42% of merchandise purchased. Only one supplier accounted for more than 10% of the Company's purchases. Other than a commitment to purchase 3.5 million units of oil products at various prices over a two-year period, the Company has no long-term contracts or minimum purchase commitments under which the Company is required to purchase merchandise. Open purchase orders are based on current inventory or operational needs and are fulfilled by suppliers within short periods of time and generally are not binding agreements.

        SELF INSURANCE    The Company has risk participation arrangements with respect to workers' compensation, general liability, automobile liability, and other casualty coverages. The Company has a wholly owned captive insurance subsidiary through which it reinsures this retained exposure. This subsidiary uses both risk sharing treaties and third party insurance to manage this exposure. The Company records both liabilities and reinsurance receivables using actuarial methods utilized in the insurance industry based upon historical claims experience. The Company maintains stop loss coverage with third party insurers through which it reinsures certain of its casualty liabilities. The Company's stop loss coverage receivables were immaterial as of January 31, 2015 and February 1, 2014. As of February 1, 2014, the Company moved to a premium-based health insurance program with third party providers.

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THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years ended January 31, 2015, February 1, 2014 and February 2, 2013

NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

        RECLASSIFICATION    Certain prior period amounts have been reclassified to conform to current period presentation. These reclassifications had no effect on reported totals for assets, liabilities, shareholders' equity, cash flows or net income.

RECENT ACCOUNTING STANDARDS

        In August 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") No. 2014-15, "Presentation of Financial Statements—Going Concern: Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern." This new standard requires management to perform interim and annual assessments of an entity's ability to continue as a going concern within one year of the date the financial statements are issued. An entity must provide certain disclosures if conditions or events raise substantial doubt about the entity's ability to continue as a going concern. This ASU is effective for annual periods ending after December 15, 2016, and interim periods thereafter; earlier adoption is permitted. The Company does not expect the adoption of ASU 2014-15 to have a material impact on the consolidated financial statements.

        In June 2014, the FASB issued ASU No. 2014-12, "Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period", which is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015 with early adoption permitted. The Company is currently evaluating the new standard, but does not expect adoption of ASU 2014-12 to have a material impact on our consolidated financial statements.

        In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers." ASU 2014-09 supersedes the revenue recognition requirements in "Topic 605, Revenue Recognition" and requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 is effective retrospectively for annual or interim reporting periods beginning after December 15, 2016, with early adoption not permitted. The Company is currently evaluating the new standard, but does not expect the adoption of ASU 2014-09 to have a material impact on the consolidated financial statements.

        In April 2014, the FASB issued ASU No. 2014-08, "Reporting of Discontinued Operations and Disclosures of Disposals of Components of an Entity." ASU 2014-08 provides a narrower definition of discontinued operations than under existing U.S. GAAP. ASU 2014-08 requires that only a disposal of a component of an entity, or a group of components of an entity, that represents a strategic shift that has, or will have, a major effect on the reporting entity's operations and financial results should be reported in the financial statements as discontinued operations. ASU 2014-08 also provides guidance on the financial statement presentations and disclosures of discontinued operations. ASU 2014-08 is effective prospectively for disposals (or classifications as held for disposal) of components of an entity that occur in annual or interim periods beginning after December 15, 2014. The Company does not expect the adoption of ASU 2014-08 to have a material impact on the consolidated financial statements.

        In July 2013, the FASB issued ASU No. 2013-11, "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists".

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THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years ended January 31, 2015, February 1, 2014 and February 2, 2013

NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

ASU 2013-11 states that an unrecognized tax benefit should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward or a tax credit carryforward, if available at the reporting date under the applicable tax law to settle any additional income taxes that would result from the disallowance of a tax position. If the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The adoption of ASU 2013-11 did not have a material impact on the Company's consolidated financial statements.

NOTE 2—ACQUISITIONS

        During 2013, the Company paid $10.7 million to purchase 18 Service & Tire Centers located in Southern California from AKH Company, Inc., which had operated under the name Discount Tire Centers. This acquisition was financed using cash on hand. Collectively, the acquired stores produced approximately $26.1 million in sales annually based on unaudited pre-acquisition historical information. The results of operations of these acquired stores are included in the Company's results of operations as of the date of acquisition.

        The Company expensed all costs related to this acquisition during Fiscal 2013. The total costs related to this acquisition were immaterial and are included in the consolidated statement of operations within selling, general and administrative expenses.

        The purchase price of the acquisition was allocated to tangible assets of approximately $0.8 million and $0.1 million in intangible assets, with the remaining $9.9 million recorded as goodwill. The goodwill was primarily related to growth opportunities and assembled workforces, and is deductible for tax purposes.

NOTE 3—OTHER CURRENT ASSETS

        The following are the components of other current assets:

(dollar amounts in thousands)
  January 31,
2015
  February 1,
2014
 

Reinsurance receivable

  $ 55,405   $ 61,182  

Income taxes receivable

    270     1,643  

Other

    311     580  

Total

  $ 55,986   $ 63,405  

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THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years ended January 31, 2015, February 1, 2014 and February 2, 2013

NOTE 4—ACCRUED EXPENSES

        The following are the components of accrued expenses:

(dollar amounts in thousands)
  January 31,
2015
  February 1,
2014
 

Casualty and medical risk insurance

  $ 141,594   $ 153,830  

Accrued compensation and related taxes

    29,984     30,645  

Sales tax payable

    13,178     12,245  

Other

    41,420     40,683  

Total

  $ 226,176   $ 237,403  

NOTE 5—DEBT AND FINANCING ARRANGEMENTS

        The following are the components of debt and financing arrangements:

(dollar amounts in thousands)
  January 31,
2015
  February 1,
2014
 

Senior Secured Term Loan, due October 2018

  $ 196,000   $ 198,000  

Revolving Credit Agreement, through July 2016

    17,000     3,500  

Long-term debt

    213,000     201,500  

Current maturities

    (2,000 )   (2,000 )

Long-term debt less current maturities

  $ 211,000   $ 199,500  

    Senior Secured Term Loan due October 2018

        On October 11, 2012, the Company entered into the Second Amended and Restated Credit Agreement among the Company, Wells Fargo Bank, N.A., as Administrative Agent, and the other parties thereto that (i) increased the size of the Company's Senior Secured Term Loan (the "Term Loan") to $200.0 million, (ii) extended the maturity of the Term Loan from October 27, 2013 to October 11, 2018, (iii) reset the interest rate under the Term Loan to the London Interbank Offered Rate (LIBOR), subject to a floor of 1.25%, plus 3.75% and (iv) added an additional 16 of the Company's owned locations to the collateral pool securing the Term Loan. The amended and restated Term Loan was deemed to be substantially different than the prior Term Loan, and therefore the modification of the debt was treated as a debt extinguishment. The Company recorded $6.5 million of deferred financing costs related to the Second Amended and Restated Credit Agreement.

        Net proceeds from the fiscal 2012 amendment and restatement of the Term Loan together with cash on hand were used to settle the Company's outstanding interest rate swap on the Term Loan as structured prior to its amendment and restatement and to satisfy and discharge all of the Company's outstanding 7.5% Senior Subordinated Notes ("Notes") due 2014. The settlement of the interest rate swap resulted in the reclassification of $7.5 million of accumulated other comprehensive loss to interest expense. The Company recognized, in interest expense, $1.9 million of deferred financing costs related to the Notes and the Term Loan as structured prior to its amendment and restatement. The interest payment and the swap settlement payment are presented within cash flows from operations on the consolidated statement of cash flows.

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THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years ended January 31, 2015, February 1, 2014 and February 2, 2013

NOTE 5—DEBT AND FINANCING ARRANGEMENTS (Continued)

        On October 11, 2012, the Company entered into two new interest rate swaps for a notional amount of $50.0 million each that together were designated as a cash flow hedge on the first $100.0 million of the Term Loan. The interest rate swaps convert the variable LIBOR portion of the interest payments due on the first $100.0 million of the Term Loan to a fixed rate of 1.855%.

        On November 12, 2013, the Company entered into the First Amendment to the Second Amended and Restated Credit Agreement. The First Amendment reduced the interest rate payable by the Company from (i) LIBOR, subject to a 1.25% floor, plus 3.75% to (ii) LIBOR, subject to a 1.25% floor, plus 3.00%. The Company recorded $0.8 million of deferred financing costs related to the First Amendment.

        As of January 31, 2015, 141 stores collateralized the Term Loan. The amount outstanding under the Term Loan as of January 31, 2015 and February 1, 2014 was $196.0 million and $198.0 million, respectively.

    Revolving Credit Agreement Through July 2016

        The Company has a Revolving Credit Agreement among the Company, Bank of America, N.A., as Administrative Agent, and the other parties thereto providing for borrowings of up to $300.0 million and having a maturity of July 2016. The interest rate on this facility is LIBOR plus a margin of 2.00% to 2.50% for LIBOR rate borrowings or Prime plus 1.00% to 1.50% for Prime rate borrowings. The margin is based upon the then current availability under the facility. As of January 31, 2015, the Company had $17.0 million outstanding under the facility and $35.1 million of availability was utilized to support outstanding letters of credit. Taking into account the borrowing base requirements (including reduction for amounts outstanding under the trade payable program), as of January 31, 2015 there was $138.4 million of availability remaining under the facility.

    Other Matters

        The Company's debt agreements require compliance with covenants. The most restrictive of these covenants, an earnings before interest, taxes, depreciation and amortization ("EBITDA") requirement, is triggered if the Company's availability under its Revolving Credit Agreement plus unrestricted cash drops below $50.0 million. As of January 31, 2015, the Company was in compliance with all financial covenants contained in its debt agreements. The weighted average interest rate on all debt borrowings during fiscal 2014 and 2013 was 4.1% and 4.9%, respectively.

        The Company has a trade payable program with availability up to $200.0 million which is funded by various bank participants who have the ability, but not the obligation, to purchase account receivables owed by the Company directly from suppliers. The Company, in turn, makes the regularly scheduled full supplier payments to the bank participants. The outstanding balance under the program was $140.9 million and $129.8 million under the program as of January 31, 2015 and February 1, 2014, respectively.

        The Company has letter of credit arrangements in connection with its risk management and import merchandising programs. The Company had $8.1 million and $13.9 million outstanding commercial letters of credit as of January 31, 2015 and February 1, 2014, respectively. The Company was

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years ended January 31, 2015, February 1, 2014 and February 2, 2013

NOTE 5—DEBT AND FINANCING ARRANGEMENTS (Continued)

contingently liable for $27.0 million and $30.9 million in outstanding standby letters of credit as of January 31, 2015 and February 1, 2014, respectively.

        The Company is also contingently liable for surety bonds in the amount of approximately $12.8 million and $10.6 million as of January 31, 2015 and February 1, 2014, respectively. The surety bonds guarantee certain payments (for example utilities, easement repairs, licensing requirements and customs fees).

        The annual maturities of long-term debt, for the next five fiscal years are:

(dollar amounts in thousands)
  Long-Term Debt  

Fiscal Year

       

2015

  $ 2,000  

2016

    19,000  

2017

    2,000  

2018

    190,000  

2019

     

Thereafter

     

Total

  $ 213,000  

        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 obligations and are considered a level 2 measure under the fair value hierarchy. The estimated fair value of long-term debt including current maturities was $211.0 million and $203.7 million as of January 31, 2015 and February 1, 2014, respectively.

NOTE 6—LEASE AND OTHER COMMITMENTS

        The aggregate minimum rental payments for all leases having initial terms of more than one year are as follows:

(dollar amounts in thousands)
  Operating
Leases
 

Fiscal Year

       

2015

  $ 114,258  

2016

    106,774  

2017

    99,370  

2018

    87,919  

2019

    78,813  

Thereafter

    259,087  

Aggregate minimum lease payments

  $ 746,221  

        Rental expense incurred for operating leases in fiscal 2014, 2013, and 2012 was $108.2 million, $102.3 million and $97.9 million, respectively, and are recorded primarily in cost of revenues. The

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THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years ended January 31, 2015, February 1, 2014 and February 2, 2013

NOTE 6—LEASE AND OTHER COMMITMENTS (Continued)

deferred gain for all sale leaseback transactions is being recognized as a reduction of costs of merchandise sales and costs of service revenues over the minimum term of these leases.

NOTE 7—ASSET RETIREMENT OBLIGATIONS

        The Company records asset retirement obligations as incurred and when reasonably estimable, including obligations for which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the Company. The obligation principally represents the removal of leasehold improvements from stores upon termination of store leases. The obligations are recorded as liabilities at fair value using discounted cash flows and are accreted over the lease term. Costs associated with the obligations are capitalized and amortized over the estimated remaining useful life of the asset.

        The Company has recorded a liability pertaining to the asset retirement obligation in other long-term liabilities on its consolidated balance sheet. Changes in assumptions reflect favorable experience with the rate of occurrence of obligations and expected settlement dates. The liability for asset retirement obligations activity from February 2, 2013 through January 31, 2015 is as follows:

(dollar amounts in thousands)
   
 

Asset retirement obligation at February 2, 2013

  $ 5,963  

Additions

    245  

Change in assumptions

    (287 )

Settlements

    (12 )

Accretion expense

    334  

Asset retirement obligation at February 1, 2014

    6,243  

Additions

    113  

Change in assumptions

    (734 )

Settlements

    (48 )

Accretion expense

    350  

Asset retirement obligation at January 31, 2015

  $ 5,924  

NOTE 8—INCOME TAXES

        The components of (loss) income from continuing operations before income tax (benefit) expense are as follows:

 
  Year Ended  
(dollar amounts in thousands)
  January 31,
2015
  February 1,
2014
  February 2,
2013
 

Domestic

  $ (32,878 ) $ 8,533   $ 14,577  

Foreign

    1,336     757     7,923  

Total

  $ (31,542 ) $ 9,290   $ 22,500  

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THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years ended January 31, 2015, February 1, 2014 and February 2, 2013

NOTE 8—INCOME TAXES (Continued)

        The provision for income tax (benefit) expense includes the following:

 
  Year Ended  
(dollar amounts in thousands)
  January 31,
2015
  February 1,
2014
  February 2,
2013
 

Current:

                   

Federal

  $   $ (267 ) $ (338 )

State

    689     451     471  

Foreign

    1,383     2,132     1,636  

Deferred:

                   

Federal(a)

    (6,716 )   2,765     6,548  

State

    1,028     840     988  

Foreign

    (965 )   (3,684 )   40  

Total income tax (benefit) expense from continuing operations(a)

  $ (4,581 ) $ 2,237   $ 9,345  

(a)
Excludes tax benefit recorded to discontinued operations of $0.2 million, $0.1 million and $0.2 million in fiscal years 2014, 2013 and 2012, respectively.

        A reconciliation of the statutory federal income tax rate to the effective rate for income tax (benefit) expense follows:

 
  Year Ended  
 
  January 31,
2015
  February 1,
2014
  February 2,
2013
 

Statutory tax rate

    (35.0 )%   35.0 %   35.0 %

State income taxes, net of federal tax

    3.7     6.0     4.1  

Foreign taxes, net of federal tax

    1.4     4.4     5.6  

Tax credits, net of valuation allowance

    (1.8 )   (7.5 )   (3.2 )

Foreign deferred adjustment

        (8.4 )    

Foreign tax law change impact

        (3.8 )    

Tax uncertainty adjustment

    (0.8 )   (3.0 )   (1.5 )

Goodwill impairment charge

    17.1          

Non deductible expenses

    0.9     3.5     0.5  

Stock compensation

            1.8  

Other, net

        (2.1 )   (0.8 )

    (14.5 )%   24.1 %   41.5 %

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THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years ended January 31, 2015, February 1, 2014 and February 2, 2013

NOTE 8—INCOME TAXES (Continued)

        Items that gave rise to the deferred tax accounts are as follows:

(dollar amounts in thousands)
  January 31,
2015
  February 1,
2014
 

Deferred tax assets:

             

Employee compensation

  $ 5,608   $ 3,544  

Store closing reserves

    1,179     673  

Legal reserve

    1,619     182  

Benefit accruals

    1,655     2,109  

Net operating loss carryforwards—Federal

    6,253     1,115  

Net operating loss carryforwards—State

    112,411     111,258  

Tax credit carryforwards

    28,179     26,605  

Accrued leases

    13,876     15,215  

Deferred gain on sale leaseback

    41,385     46,176  

Deferred revenue

    1,965     2,987  

Other

    4,226     1,312  

Gross deferred tax assets

    218,356     211,176  

Valuation allowance

    (108,845 )   (106,695 )

    109,511     104,481  

Deferred tax liabilities:

             

Depreciation

  $ 33,610   $ 33,059  

Inventories

    67,420     71,630  

Real estate tax

    3,495     3,300  

Insurance and other

    7,176     4,299  

Interest rate derivatives

        274  

Debt related liabilities

    2,454     3,606  

    114,155     116,168  

Net deferred tax (liability) asset

  $ (4,644 ) $ (11,687 )

        As of January 31, 2015, the Company had available tax net operating losses that can be carried forward to future years. The Company has $6.2 million of deferred tax assets related to federal net operating loss carryforwards which begin to expire in 2029. The Company has $2.8 million of deferred tax assets related to state tax net operating loss carryforwards in unitary filing jurisdictions. The balance of $109.6 million of deferred tax assets related to net operating loss carryforwards in separate company state filing jurisdictions will expire in various years beginning in 2015. The Company has recorded a full valuation allowance against these net deferred tax assets.

        The tax credit carryforward as of January 31, 2015 consists of $7.9 million of federal alternative minimum tax credits, $7.9 million of federal hiring credits and $12.4 million of various state and foreign credits. The alternative minimum tax credits have an indefinite life, while the other credits are scheduled to expire in various years starting from 2015 and have a $7.4 million valuation allowance recorded against them.

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THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years ended January 31, 2015, February 1, 2014 and February 2, 2013

NOTE 8—INCOME TAXES (Continued)

        The temporary differences between the book and tax treatment of income and expenses result in deferred tax assets and liabilities, which are included within the consolidated balance sheet. 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. To the extent the Company establishes a valuation allowance or changes the allowance in a future period, income tax expense will be impacted. In fiscal year 2014, the Company recorded a $2.1 million gross valuation allowance primarily on state net operating loss carryforwards. In fiscal year 2013, the Company recorded a benefit for gross state hiring credits of approximately $6.3 million that were impacted by a state tax law change enacted during the fiscal year that restricted the carryforward period for these credits. The Company recorded $6.7 million of gross valuation allowances on these credits and other state credit carryforwards.

        The Company and its subsidiaries' largest jurisdictions subject to income tax are U.S. federal, Puerto Rico (foreign) and various states jurisdictions, in respective order of significance. The Company's U.S. federal returns for tax years 2011 and forward are subject to examination. Foreign, state and local income tax returns are generally subject to examination for a period of three to five years after filing of the respective returns.

        A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

(dollar amounts in thousands)
  January 31,
2015
  February 1,
2014
  February 2,
2013
 

Unrecognized tax benefit balance at the beginning of the year

  $ 1,941   $ 2,274   $ 3,364  

Gross increases for tax positions taken in prior years

             

Gross decreases for tax positions taken in prior years

            (338 )

Gross increases for tax positions taken in current year

    2     13     201  

Settlements taken in current year

    (181 )        

Lapse of statute of limitations

    (276 )   (346 )   (953 )

Unrecognized tax benefit balance at the end of the year

  $ 1,486   $ 1,941   $ 2,274  

        The Company recognizes potential interest and penalties for unrecognized tax benefits in income tax expense and, accordingly, the Company recognized $0.1 million in fiscal years 2014 and 2013 related to potential interest and penalties associated with uncertain tax positions. As of January 31, 2015, February 1, 2014 and February 2, 2013, the Company has recorded $0.2 million, $0.5 million, and $0.5 million, respectively, for the payment of interest and penalties which are excluded from the unrecognized tax benefit noted above.

        Unrecognized tax benefits include $0.4 million, $0.7 million, and $0.9 million as of January 31, 2015, February 1, 2014 and February 2, 2013, respectively, that if recognized would affect the

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years ended January 31, 2015, February 1, 2014 and February 2, 2013

NOTE 8—INCOME TAXES (Continued)

Company's annual effective tax rate. The Company does not anticipate material changes to its unrecognized tax benefits within the next twelve months.

NOTE 9—STOCKHOLDERS' EQUITY

        On December 12, 2012, the Company's Board of Directors authorized a program to repurchase up to $50.0 million of the Company's common stock to be made from time to time in the open market or in privately negotiated transactions, with no expiration date. The Company did not repurchase any shares of Common Stock in fiscal 2014 and repurchased 237,624 shares of Common Stock for $2.8 million in fiscal 2013. The repurchased shares were placed into the Company's treasury.

NOTE 10—ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME

        The following table presents changes in accumulated other comprehensive (loss) income for the year ended January 31, 2015:

 
  (Loss) Gain on Cash Flow
Hedges
 
(dollar amounts in thousands)
  January 31,
2015
  February 1,
2014
 

Beginning balance

  $ 379   $ (980 )

Other comprehensive (loss) income before reclassifications, net of ($691) tax benefit and $584 tax

    (1,154 )   975  

Amounts reclassified from accumulated other comprehensive (loss) income, net of $230 and $231 tax(a)

    384     384  

Net current-period other comprehensive (loss) income

    (770 )   1,359  

Ending balance

 
$

(391

)

$

379
 

(a)
Reclassified amount increased interest expense.

NOTE 11—STORE CLOSURES AND ASSET IMPAIRMENTS

        During fiscal 2014, the Company recorded a $7.5 million impairment charge related to 35 stores, one of which was classified as held for disposal and 34 of which were classified as held and used as of January 31, 2015. Of the $7.5 million impairment charge, $2.5 million was charged to merchandise cost of sales, and $5.0 million was charged to service cost of sales. In fiscal 2013, the Company recorded a $7.7 million impairment charge related to 47, 4 of which were classified as held for disposal and 43 of which were classified as held and used as of February 1, 2014. Of the $7.7 million impairment charge, $2.4 million was charged to merchandise cost of sales, and $5.3 million was charged to service cost of sales. In fiscal 2012, the Company recorded a $10.6 million impairment charge related to 49 stores classified as held and used. Of the $10.6 million impairment charge, $5.1 million was charged to merchandise cost of sales, and $5.5 million was charged to service cost of sales. In all years 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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years ended January 31, 2015, February 1, 2014 and February 2, 2013

NOTE 11—STORE CLOSURES AND ASSET IMPAIRMENTS (Continued)

current economic conditions, management's expectations and projected trends of current operating results. The fair market value estimates are classified as a Level 2 or Level 3 measure within the fair value hierarchy. The remaining fair value of the impaired assets was $2.9 million, $4.2 million and $2.3 million at January 31, 2015, February 1, 2014 and February 2, 2013, respectively.

        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. Assets held for disposal have been valued at the lower of their carrying amount or their estimated fair value, net of disposal costs. The fair value of these assets is estimated using readily available market data for comparable properties and is classified as a Level 2 (as described in Note 17, "Fair Value Measurements") measure within the fair value hierarchy. No depreciation expense is recognized during the period the asset is held for disposal. During fiscal 2014, the Company had five stores classified as assets held for disposal, which are as follows:

 
  Year Ended  
(dollar amounts in thousands)
  January 31,
2015
 

Land

  $ 1,983  

Building and improvements

    4,653  

Accumulated depreciation

    (3,988 )

Property and equipment—net

  $ 2,648  

Number of properties

    5  

        The Company classifies the five properties as held for disposal as the Company continues to actively market the properties at prices the Company believes reasonable given current market conditions and expects to sell these properties within the next twelve months. In addition, during fiscal 2014, the Company recorded $1.2 million of impairment charges related to one store classified as held for disposal of which $0.8 million was charged to merchandise cost of sales and $0.4 million was charged to service cost of sales. In fiscal 2013, the Company recorded $0.9 million of impairment charges related to four stores classified as held for disposal of which $0.7 million was charged to merchandise cost of sales and $0.2 was charged to service cost of sales.

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THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years ended January 31, 2015, February 1, 2014 and February 2, 2013

NOTE 11—STORE CLOSURES AND ASSET IMPAIRMENTS (Continued)

        The following schedule details activity in the reserve for closed locations for the three years in the period ended January 31, 2015. The reserve balance includes remaining rent on leases net of sublease income.

(dollar amounts in thousands)
   
 

Balance, January 28, 2012

  $ 1,801  

Accretion of present value of liabilities

    137  

Change in assumptions about future sublease income, lease termination

    367  

Cash payments

    (664 )

Balance, February 2, 2013

    1,641  

Accretion of present value of liabilities

    36  

Change in assumptions about future sublease income, lease termination

    322  

Cash payments

    (1,449 )

Balance, February 1, 2014

    550  

Accretion of present value of liabilities

    29  

Change in assumptions about future sublease income, lease termination

    1,434  

Cash payments

    (538 )

Balance, January 31, 2015

  $ 1,475  

NOTE 12—GOODWILL

        The following table reflects the carrying amount and the changes in goodwill carrying amount:

(dollar amounts in thousands)
   
 

Balance, February 2, 2013

  $ 46,917  

Acquisitions

    9,877  

Impairments

     

Balance, February 1, 2014

    56,794  

Acquisitions

     

Impairments(a)

    (23,925 )

Balance, January 31, 2015

  $ 32,869  

(a)
Cumulative charge to date of $23.9 million

        As described in Note 1—Summary of Significant Accounting Policies, the Company reviews goodwill for impairment annually during its fourth fiscal quarter and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable.

        We determine the fair value of reporting units using a weighting of fair values derived from valuations using both the income approach and the market approach. Using the income approach the Company calculated the fair value of each reporting unit based upon a discounted cash flow analysis, which requires significant management assumptions and estimates regarding industry, economic factors

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THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years ended January 31, 2015, February 1, 2014 and February 2, 2013

NOTE 12—GOODWILL (Continued)

and the future profitability of our businesses. The market approach developed an estimated fair value based on market multiples of revenue and earnings derived from comparable publicly traded companies with operating and investment characteristics that were comparable to the operating and investment characteristics of the Reporting Unit.

        We established, and continue to evaluate, our reporting units based on our internal reporting structure and define such reporting units at the operating segment level.

        The key assumptions used in the discounted cash flow approach include:

    The reporting unit's projections of financial results, which range from 1 to five years. In general, our reporting units' fair values are most sensitive to our sales growth and operating profit rate assumptions, which represent estimates based on our current and projected sales mix, profit improvement opportunities and market conditions. If the business climate deteriorates, or if we fail to manage our businesses successfully, then actual results may not be consistent with these assumptions and estimates, and our goodwill may become impaired.

    The projected terminal value for each reporting unit represents the present value of projected cash flows beyond the last period in the discounted cash flow analysis. The terminal values are most sensitive to our assumptions regarding long-term growth rates, which are based on several factors including macroeconomic variables and future growth plans. While we believe our long-term growth assumptions are reasonable in relation to these factors and our historical results, actual growth rates may be lower than our assumptions due to a variety of potential causes, such as a secular decline in demand for our products and services, unforeseen competition and long-term GDP growth rates in being lower than historical growth rates.

    The discount rate, used to measure the present value of the projected future cash flows, is set using a weighted-average cost of capital method that considers market and industry data as well as our specific risk factors that are likely to be considered by a market participant. The weighted-average cost of capital is our estimate of the overall after-tax rate of return required by equity and debt holders of a business enterprise. The reporting units' weighted-average costs of capital in future periods may be impacted by adverse changes in market and economic conditions, including risk-free interest rates, and are subject to change based on the facts and circumstances that exist at the time of the valuation.

        The fair values of all of our reporting units are based on underlying assumptions that represent our best estimates. Many of the factors used in assessing fair value are outside of the control of management and if actual results are not consistent with our assumptions and judgments, we could be exposed to further impairment charges. To validate the reasonableness of our reporting units' estimated fair values, we reconcile the aggregate fair values of our reporting units to our total market capitalization.

        The Company's evaluation resulted in fair values for three reporting units being substantially below their respective carrying values and an implied fair value for which resulted in the Company recording a $23.9 million non-cash goodwill impairment charge in fiscal 2014. The primary factor that contributed to the impairment was a decline in sales and earnings in 2014 combined with the expectation of slower growth in the projection period. The remaining three reporting units had an aggregate goodwill balance of $32.9 million and the fair values substantially exceeded their carrying value.

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THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years ended January 31, 2015, February 1, 2014 and February 2, 2013

NOTE 13—EARNINGS PER SHARE

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

 
   
  Year Ended  
(dollar amounts in thousands, except per share amounts)
  January 31,
2015
  February 1,
2014
  February 2,
2013
 

(a)

 

(Loss)earnings from continuing operations before discontinued operations

  $ (26,961 ) $ 7,053   $ 13,155  

 

Loss from discontinued operations, net of tax benefit of $179, $102 and $186

    (332 )   (188 )   (345 )

 

Net (loss) earnings

  $ (27,293 ) $ 6,865   $ 12,810  

(b)

 

Basic average number of common shares outstanding during period

    53,608     53,378     53,225  

 

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

        585     729  

(c)

 

Diluted average number of common shares assumed outstanding during period

    53,608     53,963     53,954  

 

Basic earnings per share:

                   

 

Earnings from continuing operations (a/b)

  $ (0.50 ) $ 0.13   $ 0.25  

 

Discontinued operations, net of tax

    (0.01 )       (0.01 )

 

Basic earnings per share

  $ (0.51 ) $ 0.13   $ 0.24  

 

Diluted earnings per share:

                   

 

Earnings from continuing operations (a/c)

  $ (0.50 ) $ 0.13   $ 0.24  

 

Discontinued operations, net of tax

    (0.01 )        

 

Diluted earnings per share

  $ (0.51 ) $ 0.13   $ 0.24  

        Certain stock options were excluded from the calculations of diluted earnings per share because their exercise prices were greater than the average market price of the common shares for the period then ended and therefore would be anti-dilutive. The total number of stock options, restricted stock units and performance share units excluded from the diluted earnings per share calculation was 2,407,000; 937,000; and 859,000 as of January 31, 2015, February 1, 2014, and February 2, 2013, respectively.

NOTE 14—BENEFIT PLANS

DEFINED BENEFIT AND CONTRIBUTION PLANS

        On January 31, 2014, the Company's non-qualified defined contribution Supplemental Executive Retirement Plan (the "Account Plan") for key employees designated by the Board of Directors was amended to eliminate the retirement plan contributions that have historically been made by the Company effective for calendar year 2015. The Company did not contribute to the Account Plan in

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THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years ended January 31, 2015, February 1, 2014 and February 2, 2013

NOTE 14—BENEFIT PLANS (Continued)

2014 and the Company's contribution expense for the Account Plan was $0.8 million and $0.1 million for fiscal 2013 and 2012, respectively.

        The Company has a qualified 401(k) savings plan and a separate savings plan for employees residing in Puerto Rico, which cover all full-time employees who are at least 18 years of age and have completed the lesser of (1) six consecutive months of employment and have a minimum of 500 hours of service and (2) 12 consecutive months and have a minimum of 1,000 hours of service. The Company contributes the lesser of 50% of the first 6% of a participant's pre-tax contributions or 3% of the participant's compensation under both savings plans. For fiscal 2012, the Company's contributions were conditional upon the achievement of certain pre-established financial performance goals which were not met in fiscal 2012. The Company's contributions for fiscal 2013 and fiscal 2014 were not conditional on any financial performance goals. The Company's savings plans' contribution expense in fiscal 2014 and 2013 was $3.2 million and $3.5 million respectively. The Company had no contribution expense in fiscal 2012.

        During the fourth quarter of fiscal 2012, the Company terminated its defined benefit pension plan and contributed $14.1 million to fully fund the plan on a termination basis. Accordingly, the Company has no further defined benefit pension expense. The participants' benefits were converted into a lump sum cash payment or an annuity contract placed with an insurance carrier. The Company used a fiscal year end measurement date for determining the benefit obligation and the fair value of Plan assets. The actuarial computations were made using the "projected unit credit method." Variances between actual experience and assumptions for costs and returns on assets were amortized over the remaining service lives of employees under the Plan.

        Pension expense is as follows:

 
  Year ended  
(dollar amounts in thousands)
  February 2,
2013
 

Service cost

  $  

Interest cost

    2,170  

Expected return on plan assets

    (2,658 )

Amortization of prior service cost

    13  

Recognized actuarial loss

    1,896  

Net Period Pension Cost

    1,421  

Settlement Charge

    17,753  

Net Period Pension Cost

  $ 19,174  

DEFERRED COMPENSATION PLAN

        The Company maintains a non-qualified deferred compensation plan that allows its officers and certain other employees to defer up to 20% of their annual salary and 100% of their annual bonus. Through fiscal 2013, the first 20% of an officer's bonus deferred into the Company's stock was matched by the Company on a one-for-one basis with Company stock that vests and is expensed over three years. The shares required to satisfy distributions of voluntary bonus deferrals and the accompanying

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THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years ended January 31, 2015, February 1, 2014 and February 2, 2013

NOTE 14—BENEFIT PLANS (Continued)

match in the Company's stock are issued from its treasury account. On January 31, 2014, the Company amended the deferred compensation plan to eliminate the automatic matching employer contributions effective for fiscal 2014.

RABBI TRUST

        The Company establishes and maintains a deferred liability for the non-qualified deferred compensation plan and the Account Plan. The Company plans to fund this liability by remitting the officers' deferrals to a Rabbi Trust where these are invested in variable life insurance policies. These assets are included in non-current other assets and are considered to be a Level 2 measure within the fair value hierarchy. Accordingly, all gains and losses on these underlying investments, which are held in the Rabbi Trust to fund the deferred liability, are recognized in the Company's Consolidated Statement of Operations. Under these plans, there were liabilities of $5.1 million at January 31, 2015 and $6.9 million at February 1, 2014, respectively, which are recorded primarily in other long-term liabilities.

NOTE 15—EQUITY COMPENSATION PLANS

        The Company has a stock-based compensation plan (the "Stock Incentive Plan") under which it has previously granted, and may continue to grant, non-qualified stock options, incentive stock options, restricted stock units ("RSUs"), and Performance Share Units ("PSUs") to key employees and members of its Board of Directors. As of January 31, 2015, there were 2,643,520 awards outstanding and 2,455,697 awards available for grant under the Stock Incentive Plan.

        Incentive stock options and non-qualified stock options granted to non-officers vest fully on the third anniversary of their grant date and to officers vest in equal tranches over three year periods. All currently outstanding options carry an expiration date of seven years. RSUs previously granted to non-officers vest fully on the third anniversary of their grant date. RSUs previously granted to officers vest in equal tranches over three year periods. PSUs granted to officers vest on the third anniversary of their grant date if, and only if, certain predetermined performance targets are achieved.

        The Company has also granted RSUs under the Stock Incentive Plan in conjunction with its non-qualified deferred compensation plan. Under the deferred compensation plan, through fiscal 2013, the first 20% of an officer's bonus deferred into the Company's stock fund was matched by the Company on a one-for-one basis with RSUs that vest over a three-year period, with one third vesting on each of the first three anniversaries of the grant date. On January 31, 2014, the Company amended and restated the deferred compensation plan to eliminate the automatic matching employer contributions effective for fiscal 2014.

        The terms and conditions applicable to future grants under the Stock Incentive Plan are generally determined by the Board of Directors, provided that the exercise price of stock options must be at least 100% of the quoted market price of the common stock on the grant date. The Company currently satisfies all share requirements resulting from RSU and PSU conversions and option exercises from its treasury stock. The Company believes its treasury share balance at January 31, 2015 is adequate to satisfy such activity during the next twelve-month period.

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THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years ended January 31, 2015, February 1, 2014 and February 2, 2013

NOTE 15—EQUITY COMPENSATION PLANS (Continued)

        The following table summarizes the options under the Stock Incentive Plan:

 
  Fiscal Year 2014  
 
  Shares   Weighted Average
Exercise Price
 

Outstanding—beginning of year

    1,658,471   $ 8.67  

Granted

    1,234,447     8.02  

Exercised

    (255,023 )   3.73  

Forfeited

    (878,801 )   7.15  

Expired

    (212,818 )   13.11  

Outstanding—end of year

    1,546,276     9.22  

Vested and expected to vest options—end of year

    1,499,115     9.18  

Options exercisable—end of year

    921,422     8.28  

        The following table summarizes information about options during the last three fiscal years (dollars in thousands except per option):

 
  Fiscal 2014   Fiscal 2013   Fiscal 2012  

Weighted average fair value at grant date per option

  $ 2.25   $ 5.11   $ 4.65  

Intrinsic value of options exercised

  $ 1,532   $ 1,059   $ 874  

        The aggregate intrinsic value of outstanding options, exercisable options and expected to vest options at January 31, 2015 was $1.5 million, $1.5 million and $0.0 million, respectively. At January 31, 2015, the weighted average remaining contractual term of outstanding options, exercisable options and expected to vest options was 4.2 years, 2.9 years and 6.2 years, respectively. At January 31, 2015, there was approximately $1.7 million of total unrecognized pre-tax compensation cost related to non-vested stock options, which is expected to be recognized over a weighted average period of 1.4 years.

        The following table summarizes information about non-vested PSUs and RSUs since February 1, 2014:

 
  Number of
PSUs
  Number of
RSUs
  Total   Weighted Average
Fair Value
 

Nonvested at February 1, 2014

    675,513     149,945     825,458   $ 10.68  

Granted

    367,102     337,111     704,213     8.03  

Forfeited

    (581,609 )   (45,604 )   (627,213 )   7.37  

Vested

        (142,942 )   (142,942 )   10.59  

Nonvested at January 31, 2015

    461,006     298,510     759,516     7.93  

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THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years ended January 31, 2015, February 1, 2014 and February 2, 2013

NOTE 15—EQUITY COMPENSATION PLANS (Continued)

        The following table summarizes information about PSUs and RSUs, in the aggregate, during the last three fiscal years:

(dollar amounts in thousands)
  Fiscal 2014   Fiscal 2013   Fiscal 2012  

Weighted average fair value at grant date per unit

  $ 8.03   $ 12.23   $ 9.48  

Fair value at vesting date

  $ 1,463   $ 758   $ 768  

Intrinsic value at conversion date

  $ 188   $ 525   $ 218  

Tax benefits realized from conversions

  $ 71   $ 197   $ 82  

        At January 31, 2015, there was approximately $3.0 million of total unrecognized pre-tax compensation cost related to non-vested PSUs and RSUs, in the aggregate, which is expected to be recognized over a weighted-average period of 1.2 years.

        The Company recognized approximately $1.2 million, $1.2 million, and $1.1 million of compensation expense related to stock options, and approximately $1.1 million, $1.8 million, and $0.2 million of compensation expense related to PSUs and RSUs in the aggregate, included in selling, general and administrative expenses for fiscal 2014, 2013, and 2012, respectively. The related tax benefit recognized was approximately $0.9 million, $1.1 million and $0.4 million for fiscal 2014, 2013, and 2012, respectively.

        Expected volatility is based on historical volatilities for a time period similar to that of the expected term and the expected term of the options is based on actual experience. 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 estimated on the date of grant using the Black-Scholes option-pricing model. The following are the weighted-average assumptions:

 
  Year ended  
 
  January 31,
2015
  February 1,
2014
  February 2,
2013
 

Dividend yield

    0 %   0 %   0 %

Expected volatility

    41 %   53 %   58 %

Risk-free interest rate range:

                   

High

    1.5 %   0.7 %   0.6 %

Low

    0.1 %   0.7 %   0.5 %

Ranges of expected lives in years

    1 - 5     4 - 5     4 - 5  

        The Company granted approximately 155,000 and 109,000 PSUs in fiscal 2014 and 2013, respectively that will vest if the employees remain continuously employed through the third anniversary date of the grant and the Company achieves a return on invested capital target for fiscal years 2016 and 2015, respectively. 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 in fiscal years 2016 and 2015, respectively. At the date of the grants, the fair values were $10.26 per unit and $11.85 per unit for the 2014 and 2013 awards, respectively. The Company also granted approximately 77,000 and 55,000 PSUs for fiscal 2014 and 2013, respectively, 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 total shareholder return target in fiscal 2016 and 2015, respectively. The number of

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THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years ended January 31, 2015, February 1, 2014 and February 2, 2013

NOTE 15—EQUITY COMPENSATION PLANS (Continued)

underlying shares that may become exercisable will range from 0% to 175% depending on whether the market condition is achieved. The Company used a Monte Carlo simulation to estimate a $9.13 per unit and $13.41 per unit grant date fair value for the 2014 and 2013 PSUs, respectively. The non-vested restricted stock award table reflects the maximum vesting of underlying shares for performance and market based awards granted in both 2014 and 2013.

        During fiscal 2014 and 2013, the Company granted approximately 900 and 4,000 restricted stock units, respectfully, for officers' deferred bonus matches under the Company's non-qualified deferred compensation plan, which vest over a three-year period. The fair value of these awards was $12.27 and $11.25 per unit and the compensation expense recorded for these awards was immaterial. The Company did not grant any restricted stock units for officers' deferred bonus matches under the Company's non-qualified deferred compensation plan during fiscal 2012.

        During fiscal 2014, the Company granted approximately 58,000 restricted stock units to its non-employee directors of the board, which vest over a one-year period with a quarter vesting on each of the first four quarters following their grant date. The fair value for these awards was $11.25 per unit. During fiscal 2013, the Company granted approximately 54,000 restricted stock units to its non-employee directors of the board, which vest over a one-year period with a quarter vesting on each of the first four quarters following their grant date. The fair value for these awards was $12.05 per unit. During fiscal 2012, the Company granted approximately 33,000 restricted stock units to its non-employee directors of the board, which vest over a one-year period with a quarter vesting on each of the first four quarters following their grant date. The fair value was $9.98 per unit.

        The Company reflects in its consolidated statement of cash flows any tax benefits realized upon the exercise of stock options or issuance of RSUs in excess of that which is associated with the expense recognized for financial reporting purposes. The amounts reflected as financing cash inflows and operating cash outflows in the Consolidated Statement of Cash Flows for fiscal 2014, 2013 and 2012 are immaterial.

        During fiscal 2011, the Company began an employee stock purchase plan which provides eligible employees the opportunity to purchase shares of the Company's stock at a stated discount through regular payroll deductions. The aggregate number of shares of common stock that may be issued or transferred under the plan is 2,000,000 shares. All shares purchased by employees under this plan will be issued through treasury stock. The Company's expense for the discount during fiscal years 2014, 2013 and 2012 was immaterial. As of January 31, 2015, there were 1,803,880 shares available for issuance under this plan.

NOTE 16—INTEREST RATE SWAP AGREEMENT

        In the third quarter of fiscal 2012, the Company settled its interest rate swap designated as a cash flow hedge on $145.0 million of the Company's Term Loan prior to its amendment and restatement. The swap was used to minimize interest rate exposure and overall interest costs by converting the variable component of the total interest rate to a fixed rate of 5.04%. Since February 1, 2008, this swap was deemed to be fully effective and all adjustments in the interest rate swap's fair value were recorded to accumulated other comprehensive loss. The settlement of this swap resulted in an interest charge of $7.5 million, which was previously recorded within accumulated other comprehensive loss. Immediately

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THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years ended January 31, 2015, February 1, 2014 and February 2, 2013

NOTE 16—INTEREST RATE SWAP AGREEMENT (Continued)

subsequent to the previous interest rate swap's settlement, on October 11, 2012, the Company entered into two new interest rate swaps for a notional amount of $50.0 million each that together are designated as a cash flow hedge on the first $100.0 million of the amended and restated Term Loan. The Company uses interest rate swap agreements to hedge the variability in cash flows related to interest payments. The interest rate swaps convert the variable LIBOR portion of the interest payments due on the first $100.0 million of the Term Loan to a fixed rate of 1.86%. As of January 31, 2015 and February 1, 2014, the fair value of the new swap was a net $0.6 million liability and a net $0.6 million asset, respectively, recorded within other long-term liabilities and other long-term assets on the balance sheet.

        The Company's refinancing of the $200.0 million Term Loan on November 12, 2013, which lowered the interest rate payable by the Company from LIBOR, subject to a 1.25% floor plus 3.75%, to LIBOR, subject to a 1.25% floor plus 3.00%, had no impact on the Company's interest rate swap or hedge accounting.

NOTE 17—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.

    Assets and Liabilities that are Measured at Fair Value on a Recurring Basis:

        The Company's long-term investments and interest rate swap agreements are measured at fair value on a recurring basis. The information in the following paragraphs and tables primarily addresses matters relative to these assets and liabilities.

    Cash equivalents:

        Cash equivalents, other than credit card receivables, include highly liquid investments with an original maturity of three months or less at acquisition. The Company carries these investments at fair

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years ended January 31, 2015, February 1, 2014 and February 2, 2013

NOTE 17—FAIR VALUE MEASUREMENTS (Continued)

value. As a result, the Company has determined that its cash equivalents in their entirety are classified as a Level 1 measure within the fair value hierarchy.

    Collateral investments:

        Collateral investments include monies on deposit that are restricted. The Company carries these investments at fair value. As a result, the Company has determined that its collateral investments are classified as a Level 1 measure within the fair value hierarchy.

    Deferred compensation assets:

        Deferred compensation assets include variable life insurance policies held in a Rabbi Trust. The Company values these policies using observable market data. The inputs used to value the variable life insurance policy fall within Level 2 of the fair value hierarchy.

    Derivative liability:

        The Company has two interest rate swaps designated as cash flow hedges on $100.0 million of the Company's Senior Secured Term Loan facility that expires in October 2018. The Company values this swap using observable market data to discount projected cash flows and for credit risk adjustments. The inputs used to value derivatives fall within Level 2 of the fair value hierarchy.

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

 
   
  Fair Value Measurements
Using Inputs Considered as
 
 
  Fair Value at
January 31,
2015
 
(dollar amounts in thousands)
Description
  Level 1   Level 2   Level 3  

Assets:

                         

Cash and cash equivalents

  $ 38,044   $ 38,044   $   $  

Collateral investments(a)

    21,611     21,611          

Deferred compensation assets(a)

    4,382         4,382      

Other liabilities

                         

Derivative liability(b)

    625         625      

(a)
included in other long-term assets

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THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years ended January 31, 2015, February 1, 2014 and February 2, 2013

NOTE 17—FAIR VALUE MEASUREMENTS (Continued)

 
   
  Fair Value Measurements
Using Inputs Considered as
 
 
  Fair Value at
February 1,
2014
 
(dollar amounts in thousands)
Description
  Level 1   Level 2   Level 3  

Assets:

                         

Cash and cash equivalents

  $ 33,431   $ 33,431   $   $  

Collateral investments(a)

    21,611     21,611          

Deferred compensation assets(a)

    4,242         4,242      

Other assets

                         

Derivative asset(a)

    606         606      

(a)
included in other long-term assets

(b)
included in other long-term liabilities

        The following represents the impact of fair value accounting for the Company's derivative liability on its consolidated financial statements:

(dollar amounts in thousands)
  Amount of Gain
(Loss) in Other
Comprehensive
Income
(Effective Portion)
  Earnings Statement
Classification
  Amount of Loss
Recognized in
Earnings
(Effective Portion)
 

Fiscal 2014

  $ (770 ) Interest expense   $ 613  

Fiscal 2013

    1,359   Interest expense     614  

    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. Measurements of assets held and used are discussed in Note 11, "Store Closures and Asset Impairments."

NOTE 18—LEGAL MATTERS

        The Company is party to various 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 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 will 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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THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years ended January 31, 2015, February 1, 2014 and February 2, 2013

NOTE 19—QUARTERLY FINANCIAL DATA (UNAUDITED)

 
   
   
   
   
   
  (Loss) /
Earnings Per
Share from
Continuing
Operations
   
   
   
   
 
 
   
   
   
  (Loss) /
Earnings
from
Continuing
Operations
   
  (Loss) /
Earnings Per
Share
  Market Price
Per Share
 
 
  Total
Revenues
  Gross
Profit
  Operating
(Loss) /
Profit
  (Loss) /
Earnings
 
 
  Basic   Diluted   Basic   Diluted   High   Low  

Year Ended January 31, 2015

                                                                   

4th quarter

  $ 502,423   $ 99,685   $ (28,752 ) $ (26,653 ) $ (26,666 ) $ (0.50 ) $ (0.50 ) $ (0.50 ) $ (0.50 ) $ 10.09   $ 8.43  

3rd quarter

    517,584     118,334     574     (1,770 )   (1,964 )   (0.03 )   (0.03 )   (0.03 )   (0.03 )   11.52     8.45  

2nd quarter

    525,773     124,297     3,273     (177 )   (273 )   0.00     0.00     0.00     0.00     11.52     9.86  

1st quarter

    538,821     133,126     6,045     1,637     1,608     0.03     0.03     0.03     0.03     13.27     10.17  

Year Ended February 1, 2014

                                                                   

4th quarter

  $ 495,733   $ 104,016   $ (6,614 ) $ (3,267 ) $ (3,331 ) $ (0.06 ) $ (0.06 ) $ (0.06 ) $ (0.06 ) $ 13.86   $ 11.36  

3rd quarter

    507,042     122,812     7,641     1,013     964     0.02     0.02     0.02     0.02     13.05     11.01  

2nd quarter

    527,619     138,708     17,748     5,379     5,368     0.10     0.10     0.10     0.10     12.94     11.14  

1st quarter

    536,173     121,840     3,521     3,928     3,863     0.07     0.07     0.07     0.07     12.14     10.29  

    The sum of individual share amounts may not equal due to rounding.

        In the fourth quarter of fiscal 2014, the Company recorded on a pre-tax basis, a $23.9 million goodwill impairment charge and a gain on sale of certain properties of $14.3 million. There were no cash dividends paid in Fiscal 2014 or Fiscal 2013.

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ITEM 9    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

        None.

ITEM 9A    CONTROLS AND PROCEDURES

        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 provide reasonable assurance that the 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 effective in providing 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 and is accumulated and communicated to management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

        There were no changes to the Company's internal control over financial reporting that occurred during the quarter ended January 31, 2015 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

        Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The Company's internal control over financial reporting is a process designed under the supervision of the Company's principal executive officer and principal financial officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company's financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.

        The Company's internal control over financial reporting includes policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company's assets that could have a material effect on the financial statements.

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        Management assessed the effectiveness of the Company's internal control over financial reporting as of January 31, 2015 based on the criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management determined that the Company's internal control over financial reporting as of January 31, 2015 was effective.

        Deloitte & Touche LLP, the Company's independent registered public accounting firm, has issued an attestation report, which is included on page 55 herein, on the Company's internal control over financial reporting as of January 31, 2015.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
The Pep Boys—Manny, Moe & Jack
Philadelphia, Pennsylvania

        We have audited the internal control over financial reporting of The Pep Boys—Manny, Moe & Jack and subsidiaries (the "Company") as of January 31, 2015, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.

        We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

        A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

        Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

        In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 31, 2015, based on the criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

        We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the fiscal year ended January 31, 2015 of the Company and our report dated April 15, 2015 expressed an unqualified opinion on those financial statements and financial statement schedule.

/s/ Deloitte & Touche LLP

Philadelphia, Pennsylvania
April 15, 2015

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ITEM 9B    OTHER INFORMATION

        None.


PART III

ITEM 10    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

        The material contained in the Company's definitive proxy statement, which will be filed pursuant to Regulation 14A not later than 120 days after the end of the Company's 2014 fiscal year (the "Proxy Statement"), under the captions "—Nominees for Election", "—Corporate Governance" and "SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE" is hereby incorporated herein by reference.

        The information regarding executive officers called for by Item 401 of Regulation S-K is included in Part I of this Form 10-K, in accordance with General Instruction G (3).

        The Company has adopted a Code of Ethics applicable to all of its associates including its executive officers. The Code of Ethics, together with any amendments thereto or waivers thereof, are posted on the Company's website www.pepboys.com under the "Investor Relations—Corporate Governance" section.

        In addition, the Board of Directors Code of Conduct and the charters of our audit, human resources and nominating and governance committees may also be found under the "Investor Relations—Corporate Governance" section of our website. As required by the New York Stock Exchange ("NYSE"), promptly following our 2014 Annual Meeting, our Chief Executive Officer certified to the NYSE that he was not aware of any violation by Pep Boys of NYSE corporate governance listing standards. Copies of our corporate governance materials are available free of charge from our investor relations department. Please call 215-430-9105 or write Pep Boys, Investor Relations, 3111 West Allegheny Avenue, Philadelphia, PA 19132.

ITEM 11    EXECUTIVE COMPENSATION

        The material contained in the Proxy Statement under the captions "—How are Directors Compensated?", "—Director Compensation Table" and "EXECUTIVE COMPENSATION" other than the material under "—Compensation Committee Report" is hereby incorporated herein by reference.

ITEM 12    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

        The material contained in the Proxy Statement under the caption "SHARE OWNERSHIP" is hereby incorporated herein by reference.

        The information regarding equity compensation plans called for by Item 201(d) of Regulation S-K is included in Item 5 of this Form 10-K.

ITEM 13    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

        The material contained in the Proxy Statement under the caption "—Certain Relationships and Related Transactions" and "—Corporate Governance" is hereby incorporated herein by reference.

ITEM 14    PRINCIPAL ACCOUNTANT FEES AND SERVICES

        The material contained in the Proxy Statement under the caption "—Registered Public Accounting Firm's Fees" is hereby incorporated herein by reference.

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PART IV

ITEM 15    EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a)
The following documents are filed as part of this report:

 
   
  Page

1.

 

The following consolidated financial statements of The Pep Boys—Manny, Moe & Jack are included in Item 8

   

 

Report of Independent Registered Public Accounting Firm

  35

 

Consolidated Balance Sheets—January 31, 2015 and February 1, 2014

  36

 

Consolidated Statements of Operations and Comprehensive Income—Years ended January 31, 2015, February 1, 2014, and February 2, 2013

  37

 

Consolidated Statements of Stockholders' Equity—Years ended January 31, 2015, February 1, 2014, and February 2, 2013

  38

 

Consolidated Statements of Cash Flows—January 31, 2015, February 1, 2014, and February 2, 2013

  39

 

Notes to Consolidated Financial Statements

  40

2.

 

The following consolidated financial statement schedule of The Pep Boys—Manny, Moe & Jack is included

 
 

 

Schedule II Valuation and Qualifying Accounts and Reserves

  78

 

All other schedules have been omitted because they are not applicable or not required or the required information is included in the consolidated financial statements or notes thereto.

 
 

3.

 

Exhibits

 
 

            
  (3.1 ) Amended and Restated Articles of Incorporation   Incorporated by reference from the Company's 10-K dated February 14, 2009.
            
  (3.2 ) By-Laws amended and restated   Incorporated by reference from the Company's 8-K dated February 17, 2010.
            
  (10.1) (1) Form of Change of Control between the Company and certain officers of the Company.   Incorporated by reference from the Company's Form 8-K dated August 6, 2012
            
  (10.2) (1) Form of Non-Competition Agreement between the Company and certain officers of the Company.   Incorporated by reference from the Company's Form 10-K for the fiscal year ended January 29, 2011.
            
  (10.3) (1) The Pep Boys—Manny, Moe & Jack 2014 Stock Incentive Plan   Incorporated by reference from the Company's Definitive Proxy Statement filed on April 25, 2014
            
  (10.4) (1) Long-Term Disability Salary Continuation Plan amended and restated as of March 26, 2002.   Incorporated by reference from the Company's Form 10-K for the fiscal year ended February 1, 2003.
            
  (10.5) (1) Amendment and restatement as of January 1, 2010 of The Pep Boys Savings Plan.   Incorporated by reference from the Company's Form 10-K for the fiscal year ended January 29, 2011.
 
       

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  (10.6) (1) Amendment 2013-1 to The Pep Boys Savings Plan   Incorporated by reference from the Company's Form 10-Q for the quarter ended November 2, 2013.
            
  (10.7) (1) Amendment 2014-1 to The Pep Boys Savings Plan   Filed herewith
            
  (10.8) (1) Amendment and restatement as of January 1, 2011 of The Pep Boys Savings Plan—Puerto Rico.   Incorporated by reference from the Company's Form 10-K for the fiscal year ended February 1, 2014.
            
  (10.9) (1) Amendment 2014-1 to The Pep Boys Savings Plan—Puerto Rico   Filed herewith
            
  (10.10) (1) Amendment 2014-2 to The Pep Boys Savings Plan—Puerto Rico   Filed herewith
            
  (10.11) (1) The Pep Boys Deferred Compensation Plan, as amended and restated   Incorporated by reference from the Company's Form 10-K for the fiscal year ended February 1, 2014.
            
  (10.12) (1) The Pep Boys Annual Incentive Bonus Plan, as amended and restated   Incorporated by reference from the Company's Form 8-K dated June 24, 2009.
            
  (10.13) (1) Account Plan, as amended and restated   Incorporated by reference from the Company's Form 10-K for the fiscal year ended February 1, 2014.
            
  (10.14) (1) The Pep Boys Grantor Trust Agreement   Incorporated by reference from the Company's Form 10-K for the fiscal year ended February 3, 2007.
            
  (10.15 ) Amended and Restated Credit Agreement, dated July 26, 2011, by and among the Company, as Lead Borrower, Bank of America, N.A., as Administrative Agent, and the other parties thereto.   Incorporated by reference from the Company's Form 8-K dated July 28, 2011.
            
  (10.16 ) First Amendment dated October 11, 2012 to the Amended and Restated Credit Agreement, dated July 26, 2011, among the Company, Bank of America, N.A., as Administrative Agent, and the other parties thereto.   Incorporated by reference from the Company's Form 8-K dated October 11, 2012.
            
  (10.17 ) Second Amended and Restated Credit Agreement, dated October 11, 2012, among the Company, Wachovia Bank, National Association, as Administrative Agent, and the other parties thereto.   Incorporated by reference from the Company's Form 8-K dated October 11, 2012.
 
       

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  (10.18 ) First Amendment to Second Amended and Restated Credit Agreement, dated November 12, 2013, among the Company, Wachovia Bank, National Association, as Administrative Agent, and the other parties thereto.   Incorporated by reference from the Company's Form 10-Q for the quarter ended November 2, 2013.
            
  (21 ) Subsidiaries of the Company   Incorporated by reference from the Company's Form 10-Q for the quarter ended April 30, 2011.
            
  (23 ) Consent of Independent Registered Public Accounting Firm   Filed herewith
            
  (31.1 ) Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002   Filed herewith
            
  (31.2 ) Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002   Filed herewith
            
  (32.1 ) Principal Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002   Filed herewith
            
  (32.2 ) Principal Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002   Filed herewith
            
  (101.INS ) XBRL Instance Document   Filed herewith
            
  (101.SCH ) XBRL Taxonomy Extension Schema Document   Filed herewith
            
  (101.CAL ) XBRL Taxonomy Extension Calculation Linkbase Document   Filed herewith
            
  (101.LAB ) XBRL Taxonomy Extension Labels Linkbase Document   Filed herewith
            
  (101.PRE ) XBRL Taxonomy Extension Presentation Linkbase Document   Filed herewith
            
  (101.DEF ) XBRL Taxonomy Extension Definition Linkbase Document   Filed herewith

(1)
Management contract or compensatory plan or arrangement.

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SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: April 15, 2015   THE PEP BOYS—MANNY, MOE & JACK
(REGISTRANT)

 

 

By:

 

/s/ DAVID R. STERN

David R. Stern
Executive Vice President—Chief Financial Officer (Principal Financial Officer)

        Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Signature
 
Capacity
 
Date

 

 

 

 

 
/s/ JOHN T. SWEETWOOD

John T. Sweetwood
  Interim Chief Executive Officer; Director (Principal Executive Officer)   April 15, 2015

/s/ DAVID R. STERN

David R. Stern

 

Executive Vice President—Chief Financial Officer (Principal Financial Officer)

 

April 15, 2015

/s/ SANJAY SOOD

Sanjay Sood

 

Vice President—Chief Accounting Officer & Controller

 

April 15, 2015

/s/ ROBERT H. HOTZ

Robert H. Hotz

 

Chairman of the Board

 

April 15, 2015

/s/ M. SHÂN ATKINS

M. Shân Atkins

 

Director

 

April 15, 2015

/s/ JAMES MITAROTONDA

James Mitarotonda

 

Director

 

April 15, 2015

/s/ ROBERT ROSENBLATT

Robert Rosenblatt

 

Director

 

April 15, 2015

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Signature
 
Capacity
 
Date

 

 

 

 

 
/s/ JANE SCACCETTI

Jane Scaccetti
  Director   April 15, 2015

/s/ ROBERT NARDELLI

Robert Nardelli

 

Director

 

April 15, 2015

/s/ ANDREA M. WEISS

Andrea M. Weiss

 

Director

 

April 15, 2015

/s/ NICK WHITE

Nick White

 

Director

 

April 15, 2015

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FINANCIAL STATEMENT SCHEDULES FURNISHED PURSUANT TO
THE REQUIREMENTS OF FORM 10-K
THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

(dollar amounts in thousands)

Column A   Column B   Column C   Column D   Column E  
Description
  Balance at
Beginning of Period
  Additions Charged
to Costs
and Expenses
  Additions Charged
to Other
Accounts
  Deductions(1)   Balance at
End of Period
 
 
  (in thousands)
 

ALLOWANCE FOR DOUBTFUL ACCOUNTS:

                               

Year ended January 31, 2015

  $ 1,320   $ 3,029   $   $ 2,745   $ 1,604  

Year ended February 1, 2014

  $ 1,302   $ 2,563   $   $ 2,546   $ 1,320  

Year ended February 2, 2013

  $ 1,303   $ 2,479   $   $ 2,480   $ 1,302  

(1)
Uncollectible accounts written off.

Column A   Column B   Column C   Column D   Column E  
Description
  Balance at
Beginning of Period
  Additions Charged
to Costs
and Expenses
  Additions Charged
to Other
Accounts(2)
  Deductions(2)   Balance at
End of Period
 
 
  (in thousands)
 

SALES RETURNS AND ALLOWANCES:

                               

Year ended January 31, 2015

  $ 806   $   $ 63,545   $ 63,231   $ 1,120  

Year ended February 1, 2014

  $ 896   $   $ 62,596   $ 62,686   $ 806  

Year ended February 2, 2013

  $ 773   $   $ 63,068   $ 62,945   $ 896  

(2)
Sales return and allowance activity is recorded through a reduction of merchandise sales and costs of merchandise sales.

78