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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended October 31, 2015

OR

For the transition period from             to            

Commission File No.  1-3381

The Pep Boys - Manny, Moe & Jack

(Exact name of registrant as specified in its charter)

215-430-9000

(Registrant’s telephone number, including area code)

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

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

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

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

As of November 27, 2015, there were 54,139,022 shares of the registrant’s Common Stock outstanding.

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Index

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PART I - FINANCIAL INFORMATION

ITEM 1  CONSOLIDATED FINANCIAL STATEMENTS

THE PEP BOYS – MANNY, MOE & JACK AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(dollar amounts in thousands, except share data)

(unaudited)

See notes to consolidated financial statements.

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THE PEP BOYS – MANNY, MOE & JACK AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(dollar amounts in thousands, except per share data)

(unaudited)

See notes to consolidated financial statements.

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THE PEP BOYS – MANNY, MOE & JACK AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollar amounts in thousands)

(unaudited)

See notes to consolidated financial statements.

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THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

NOTE 1—BASIS OF PRESENTATION

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

Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been omitted, as permitted by Rule 10-01 of the Securities and Exchange Commission’s Regulation S-X, “Interim Financial Statements.” It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2015. The results of operations for the thirty-nine weeks ended October 31, 2015 are not necessarily indicative of the operating results for the full fiscal year.

The consolidated financial statements presented herein are unaudited. In the opinion of management, all adjustments necessary to present fairly the financial position, results of operations and cash flows as of October 31, 2015 and for all periods presented have been made.

The Company’s fiscal year ends on the Saturday nearest to January 31. Fiscal 2015, which ends January 30, 2016, and Fiscal 2014, which ended January 31, 2015, are comprised of 52 weeks. The Company operated 804 store locations as of October 31, 2015, of which 225 were owned and 579 were leased.

NOTE 2—NEW ACCOUNTING STANDARDS

In November 2015, the Financial Accounting Standards Board (“FASB”), issued Accounting Standards Update (“ASU”) No. 2015-17, “Income Taxes — Balance Sheet Classification of Deferred Taxes.” To simplify the presentation of deferred income taxes, ASU 2015-17 requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. ASU 2015-17 is effective for annual reporting periods beginning after December 15, 2016, including periods within that reporting period, and early adoption is permitted. The Company is currently evaluating the new standard, but does not expect the adoption of ASU 2015-17 to have a material impact on the consolidated financial statements as the application of this guidance affects balance sheet classification only.

In September 2015, the FASB issued ASU No. 2015-16, “Business Combinations — Simplifying the Accounting for Measurement-Period Adjustments.” ASU 2015-16 requires that the cumulative impact of a measurement period adjustment be recognized in the reporting period in which the adjustment is identified. The portion of the adjustment which relates to a prior period should either be presented separately on the face of the income statement or disclosed in the notes. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, with early adoption permitted. The guidance is to be applied prospectively to adjustments to provisional amounts that occur after the effective date. The Company is currently evaluating the new standard, but does not expect the adoption of ASU 2015-16 to have a material impact on the consolidated financial statements.

In April 2015, the FASB issued ASU No. 2015-03, “Interest - Imputation of Interest.” ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. ASU 2015-03 is effective for annual reporting periods beginning after December 15, 2015, including periods within that reporting period, requires retrospective application, and early adoption is permitted. The Company is currently evaluating the new standard, but does not expect the adoption of ASU 2015-03 to have a material impact on the consolidated financial statements as the application of this guidance affects balance sheet classification only.

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

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to be entitled in exchange for those goods or services. In August of 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers — Deferral of the Effective Date.” The amendment in this update defers the effective date of ASU 2014-09, “Revenue from Contracts with Customers”, for all entities by one year. The new effective date is annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. 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.

NOTE 3—MERCHANDISE INVENTORIES

Merchandise inventories are valued at the lower of cost or market. Cost is determined by using the last-in, first-out (“LIFO”) method. An actual valuation of inventory under the LIFO method can be made only at the end of each fiscal year based on inventory and costs at that time. Accordingly, interim LIFO calculations must be based on management’s estimates of expected fiscal year-end inventory levels and costs. If the first-in, first-out (“FIFO”) method of costing inventory had been used by the Company, inventory would have been $553.0 million and $570.2 million as of October 31, 2015 and January 31, 2015, respectively.

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 upon historical levels and the results of its cycle counting program. The Company’s inventory adjustments for these matters were immaterial as of October 31, 2015 and January 31, 2015, respectively.

NOTE 4—WARRANTY RESERVE

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

The reserve for warranty cost activity for the thirty-nine weeks ended October 31, 2015 and the fifty-two weeks ended January 31, 2015 is as follows:

NOTE 5—DEBT AND FINANCING ARRANGEMENTS

The following are the components of debt and financing arrangements:

The Company has a Revolving Credit Agreement (the “Agreement”) with available borrowings up to $300.0 million and a maturity of July 2016. As of October 31, 2015, the Company had no borrowings outstanding under the Agreement and $39.6 million of availability was utilized to support outstanding letters of credit. Taking this into account and the borrowing base requirements

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(including reduction for amounts outstanding under the supplier financing program), as of October 31, 2015 there was $147.8 million of availability remaining under the Agreement.

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 October 31, 2015, the Company was in compliance with all financial covenants contained in its debt agreements.

The Company has a supplier financing 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. There was an outstanding balance of $127.8 million and $140.9 million under the program as of October 31, 2015 and January 31, 2015, respectively (classified as trade payable program liability on the consolidated balance sheet).

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 $194.5 million and $211.0 million as of October 31, 2015 and January 31, 2015, respectively.

NOTE 6—INCOME TAXES

The Company recognizes taxes payable for the current year, as well as deferred tax assets and liabilities for the future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. The Company’s effective income tax rate differs from the U.S. statutory rate principally due to state taxes, foreign taxes related to the Company’s Puerto Rico operations and certain other permanent tax items. The annual rate depends on a number of factors, including the jurisdiction in which operating profit is earned and the timing and nature of discrete items. For the thirteen weeks ended October 31, 2015 the effective tax rate was a 30.7% expense as compared to a 29.0% benefit recorded in the corresponding period of the prior year.

For the thirty-nine weeks ended October 31, 2015 and November 1, 2014, the effective tax rate was 39.8% and 138.2%, respectively. The decrease in the effective tax rate was primarily attributable to the impact of permanent tax differences relative to pre-tax earnings, along with a $0.9 million charge for a valuation allowance recorded against certain separate company state tax loss carryforwards in the prior year.

For income tax benefits related to uncertain tax positions to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. During the thirty-nine weeks ended October 31, 2015, there were no material changes to the Company’s liability for uncertain tax positions.  The Company does not expect any material increases or decreases to the amount of unrecognized tax benefits within the next 12 months.

NOTE 7—EARNINGS PER SHARE

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

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As of October 31, 2015 and November 1, 2014, respectively, there were 2,365,000 and 2,797,000 outstanding options and restricted stock units. Certain stock options were excluded from the calculation of diluted earnings per share because their exercise prices were greater than the average market price of the common shares for the periods then ended and therefore would be anti-dilutive. The total number of such shares excluded from the diluted earnings per share calculation is 1,295,000 and 2,797,000 for the thirteen weeks ended October 31, 2015 and November 1, 2014, respectively. The total number of such shares excluded from the diluted earnings per share calculation is 1,730,000 and 2,797,000 for the thirty-nine weeks ended October 31, 2015 and November 1, 2014.

NOTE 8—ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME

The following table presents changes in accumulated other comprehensive (loss) income for the thirteen and thirty-nine weeks ended October 31, 2015 and November 1, 2014, net of tax:

(a)  Reclassified amount increased interest expense.

NOTE 9—BENEFIT PLANS

The Company has a qualified 401(k) savings plan and a separate plan for employees residing in Puerto Rico, which cover all full-time employees who are at least 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 contributions or 3% of the participant’s compensation under both savings plans. The Company’s savings plans’ contribution expense was $2.2 million and $2.3 million in the first three quarters of fiscal 2015 and fiscal 2014, respectively.

NOTE 10—EQUITY COMPENSATION PLANS

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

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In the first nine months of fiscal 2015 and fiscal 2014, the Company granted approximately 707,000 and 684,000 stock options, respectively, with a weighted average grant date fair value of $3.20 per unit and $3.95 per unit, respectively. These options have a seven-year term and vest over a three-year period with a third vesting on each of the first three anniversaries of their grant date.  The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model. The compensation expense recorded for the options granted during the thirty-nine weeks ended October 31, 2015 and November 1, 2014 was immaterial.

In the first nine months of fiscal 2015 and fiscal 2014, the Company granted approximately 125,000 and 155,000 performance share units, 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 2016 and fiscal 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 2016 and fiscal 2015, respectively. The fair value for these awards was $9.63 per unit and $10.26 per unit, respectively, at the date of the grant. The compensation expense recorded for these performance share units during the thirty-nine weeks ended October 31, 2015 and November 1, 2014 was immaterial.

In the first nine months of fiscal 2015 and fiscal 2014, the Company granted approximately 81,000 and 77,000 performance share units, 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 for the three-year period ending with fiscal 2017 and fiscal 2016, respectively. The number of underlying shares that may become exercisable will range from 0% to 175% depending upon whether the market condition is achieved. The Company used a Monte Carlo simulation to estimate a $10.01 per unit and $9.13 per unit grant date fair value for fiscal 2015 and fiscal 2014, respectively. The compensation expense recorded for these performance share units during the thirty-nine weeks ended October 31, 2015 and November 1, 2014 was immaterial.

In the first nine months of fiscal 2015 and fiscal 2014, the Company granted approximately 177,000 and 116,000 restricted stock units, respectively, that will vest if the employees remain continuously employed through the third anniversary date of the grant. The fair value for these awards was $10.71 and $10.26 per unit, respectively, at the date of the grant. The compensation expense recorded for these restricted stock units during the thirty-nine weeks ended October 31, 2015 and November 1, 2014 was immaterial.

During the third quarter of fiscal 2014, the Company granted approximately 142,000 restricted stock units that vest continuously over approximately 15 months and have an average fair value of $9.28 per share.

NOTE 11—FAIR VALUE MEASUREMENTS AND DERIVATIVES

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

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 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.

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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 asset:

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 these swaps 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 tables provide information by level for assets and liabilities that are measured at fair value, on a recurring basis:

(1) Included in other long-term assets.

(2) Included in other long-term liabilities.

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

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

The fair value of the derivative was a $0.8 million and a $0.6 million liability as of October 31, 2015 and January 31, 2015, respectively. Of the $0.2 million decrease in the fair value during the thirty-nine weeks ended October 31, 2015, an immaterial portion was recorded to accumulated other comprehensive loss on the consolidated balance sheet.

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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 3 measures under the fair value hierarchy. Measurements of assets held and used are discussed in Note 12, “Impairments”.

NOTE 12—IMPAIRMENTS

During the third quarter of fiscal 2015, the Company recorded a $0.8 million impairment charge related to 1 store classified as held and used. Of the $0.8 million impairment charge, $0.5 million was charged to costs of merchandise sales, and $0.3 million was charged to costs of service revenue. In the third quarter of fiscal 2014, the Company recorded a $1.4 million impairment charge related to 10 stores classified as held and used. Of the $1.4 million impairment charge, $0.3 million was charged to costs of merchandise sales, and $1.1 million was charged to costs of service revenue. In both periods, the Company used a probability-weighted approach and estimates of expected future cash flows to determine the fair value of these stores. Discount and growth rate assumptions were derived from current economic conditions, management’s expectations and projected trends of current operating results. The remaining fair value of the impaired store is approximately $1.6 million as of October 31, 2015 and is classified as a Level 2 or 3 measure within the fair value hierarchy.

During the first nine months of fiscal 2015, the Company recorded a $3.3 million impairment of which $1.6 million was charged to costs of merchandise sales, and $1.7 million was charged to costs of service revenue. In the first nine months of fiscal 2014, the Company recorded a $5.2 million impairment charge of which $1.8 million was charged to costs of merchandise sales, and $3.5 million was charged to costs of service revenue. In all periods, the Company used a probability-weighted approach and estimates of expected future cash flows to determine the fair value of these stores. Discount and growth rate assumptions were derived from current economic conditions, management’s expectations and projected trends of current operating results. The remaining fair value of the impaired stores is approximately $3.4 million as of October 31, 2015 and is classified as a Level 2 or 3 measure within the fair value hierarchy.

NOTE 13—SALE OF PROPERTY AND LEASEHOLD INTEREST

During the third quarter of fiscal 2015, the Company sold two properties for $11.4 million and subsequently entered into a lease for a ten year period. The Company deferred a gain for $2.4 million and recognized a gain of $6.0 million.

During the first quarter of fiscal 2015, the Company sold a leasehold interest in one store for $10.0 million in exchange for termination and extinguishment of all obligations, liabilities, and benefits associated with the lease.

NOTE 14—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.

Following the announcement of the Merger Agreement (defined in Note 15 below), the following putative shareholder class action/derivative complaints relating to the Offer and the Merger were commenced.

On November 10, 2015, purported Company shareholder Stephen Bushansky filed a putative class action and derivative lawsuit on behalf of himself and a putative class of public Company shareholders, as well as on behalf of the Company derivatively (the “Bushansky Complaint”), in the Court of Common Pleas in Philadelphia County, Pennsylvania. On November 24, 2015, purported shareholder Henry Tindel filed a similar putative class action and derivative lawsuit on behalf of himself and a putative class of public Company shareholders, as well as on behalf of the Company derivatively (the “Tindel Complaint”), in the Court of Common Pleas in Philadelphia County, Pennsylvania.  In addition, on November 30, 2015, purported shareholders David Katz and John Solak each filed a similar putative class action and derivative lawsuit on behalf of himself and a putative class of public Company shareholders, as well as on behalf of the Company derivatively (the “Katz Complaint” and the “Solak Complaint”, respectively, and together with the Bushansky Complaint and the Tindel Complaint, the “State Court Complaints”), in the Court of Common Pleas in Philadelphia County, Pennsylvania.  The State Court Complaints name the Company as a nominal defendant and allege claims for breach of fiduciary duties against the Company’s directors (the “Individual Defendants”) and claims against

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Bridgestone Americas, Inc., Parent (defined in Note 15 below) and Purchaser (defined in Note 15 below) (collectively, with the Individual Defendants, the “Defendants”) for aiding and abetting the Individual Defendants’ purported breaches of fiduciary duties in connection with entering into the Merger Agreement and effecting the Transactions. The Tindel Complaint, the Katz Complaint and the Solak Complaint also allege that the Individual Defendants breached their fiduciary duties by filing a Solicitation/Recommendation Statement on Schedule 14D-9 that was allegedly materially misleading and incomplete. Despite being titled a Shareholder Class Action Complaint and including several paragraphs of class action allegations, the Solak Complaint only contains claims asserted derivatively and does not allege any claim on behalf of a class of Company shareholders. The State Court Complaints generally seek, among other relief, declaratory and injunctive relief, including an order (a) enjoining the Defendants from finalizing the Offer and consummating the proposed transaction until the purported breaches of fiduciary duty are remedied, and (b) rescinding the Merger Agreement or any actions taken under the terms of the Merger Agreement or granting rescissory damages. The State Court Complaints further seek costs and reasonable attorneys’ and experts’ fees.

Also on November 24, 2015, purported Company shareholder Jack Edwards filed a shareholder class and derivative action complaint in the United States District Court for the Eastern District of Pennsylvania (the “Edwards Complaint”, and together with the State Court Complaints, the “Shareholder Complaints”). Like the State Court Complaints, the Edwards Complaint names the Company as a nominal defendant and alleges claims for breach of fiduciary duties against the Individual Defendants and claims against Bridgestone Americas, Inc., Parent and Purchaser for aiding and abetting the Individual Defendants’ purported breaches of fiduciary duties in connection with entering the Merger Agreement and effecting the Transactions. The Edwards Complaint also alleges claims against the Defendants for violations of Section 14(e) of the Exchange Act and against the Individual Defendants for violations of Section 20(a) of the Exchange Act in connection with the filing of the Solicitation/Recommendation Statement on Schedule 14D-9.

The Company intends to vigorously defend against these claims. The outcome of this litigation cannot be predicted at this time and any outcome in favor of the plaintiffs could have an adverse effect on the proposed transaction, the Company’s financial condition, and the Company’s results of operations.

NOTE 15—SUBSEQUENT EVENT

Proposed Merger with Bridgestone Retail Operations, LLC

The Company entered into an Agreement and Plan of Merger, dated as of October 26, 2015 (as it may be amended or supplemented from time to time, the “Merger Agreement”), by and among the Company, Bridgestone Retail Operations, LLC, a Delaware limited liability company (“Parent” or “Bridgestone”) and TAJ Acquisition Co., a Pennsylvania corporation (“Purchaser”). Pursuant to the Merger Agreement, and on the terms and subject to the conditions in the Merger Agreement, Purchaser commenced a tender offer (the “Offer”) on November 16, 2015, to acquire all of the outstanding shares of our common stock at a purchase price of $15.00 per share, net to the holders thereof, in cash (the “Offer Price”), without interest thereon, less any applicable tax withholding.

The Merger Agreement contains certain conditions to Purchaser’s obligation to accept for payment shares of common stock of the Company validly tendered and not withdrawn in the Offer including, without limitation, (a) at least a majority of the shares of the common stock (calculated on a fully diluted basis in accordance with the Merger Agreement) having been validly tendered into and not withdrawn from the Offer, (b) the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”), (c) the accuracy of the representations and warranties and compliance with the covenants contained in the Merger Agreement and (d) other customary conditions.  On November 23, 2015, the Company was informed that it had been granted early termination of the waiting period under the HSR Act.

The Merger Agreement contains certain termination rights in favor of each of the Company and Bridgestone, including under certain circumstances, the requirement for the Company to pay to Bridgestone a termination fee of $35.0 million. The Company also agreed (a) to cease any existing, and agreed not to solicit or initiate any additional, discussions with third parties regarding other proposals to acquire the Company and (b) to certain restrictions on the Company’s ability to respond to such proposals, subject to fulfillment of certain requirements.

The Merger Agreement provides, among other things, that as soon as practicable (and in any event within three business days) following Purchaser’s acceptance for payment, upon the terms and subject to the conditions of the Offer set forth in the Merger Agreement, of all shares validly tendered and not validly withdrawn at the then-scheduled expiration of the Offer and satisfaction or waiver of the remaining applicable conditions set forth in the Merger Agreement, Purchaser will merge with and into the Company (the “Merger” and, together with the Offer and the other transactions contemplated by the Merger Agreement, the “Transactions”), with the Company surviving the Merger as a wholly owned subsidiary of Parent (the “Surviving Corporation”).   Consummation of the Merger is subject to certain conditions, including, without limitation, that after the completion of the Offer and to the extent that Parent and Purchaser do not complete the Merger through a “short-form merger” pursuant to applicable Pennsylvania law, the Company will hold a special meeting of shareholders to seek shareholder approval of the Merger.

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At the effective time of the Merger (the “Effective Time”), each share not purchased in the Offer, other than shares held directly or indirectly by the Company, Parent or Purchaser or any of their respective wholly owned subsidiaries (which will automatically be cancelled and retired and will cease to exist) or any shareholder of the Company who duly exercises dissenters’ rights under Pennsylvania law, will be converted into the right to receive an amount, in cash and without interest, equal to the Offer Price (the “Merger Consideration”).

In connection with the Merger, each outstanding option award (each, a “Company Option”) granted under the Company 2014 Stock Incentive Plan (previously referred to as the Company 1999 Stock Incentive Plan and the Company 2009 Stock Incentive Plan) (the “Company Stock Plans”), whether or not exercisable or vested, will become fully vested and exercisable, and will, as of the Effective Time, be cancelled and converted into the right of the holder thereof to receive from the Surviving Corporation as soon as administratively practicable following the Effective Time (in conjunction with the Surviving Corporation’s regular payroll process) an amount in cash equal to the product of (a) the excess, if any, of the Merger Consideration over the applicable per share exercise price of each such Company Option and (b) the number of shares subject to such Company Option, less any applicable tax withholding. Any Company Option which has an exercise price that is equal to or more than the Merger Consideration will be cancelled without any cash payment. As of the Effective Time, each holder of Company Options will cease to have any rights with respect thereto, except for the right to receive the payment (if any) described in this paragraph.

In connection with the Merger, each outstanding restricted stock unit award granted pursuant to the Company Stock Plans representing the right to receive shares that vest over the passage of time (including any such award that previously became vested, but which was deferred under the terms of such restricted stock unit award) (each, a “Company RSU”) will vest (to the extent not vested) and will be cancelled and converted into the right of the holder thereof to receive from the Surviving Corporation as soon as administratively practicable following the Effective Time (in conjunction with the Surviving Corporation’s regular payroll process) an amount in cash equal to the product of (a) the Merger Consideration and (b) the number of units covered by such Company RSU that have not been settled or paid immediately prior to the Effective Time, less any applicable tax withholding. As of the Effective Time, each holder of Company RSUs will cease to have any rights with respect thereto, except for the right to receive the payment (if any) described in this paragraph. The Company will provide for the cancellation and conversion of the Company RSUs that were deferred in accordance with the requirements of Treasury Regulation Section 1.409A-3(j)(4)(ix)(B).

In connection with the Merger, each outstanding restricted stock unit award granted pursuant to the Company Stock Plans representing the right to receive shares that vest based on the level of achievement of performance goals (each, a “Company PSU”) will vest as if the applicable performance goals had been achieved at the target level of performance at the end of the applicable performance period (to the extent not vested) and will be cancelled and converted into the right of the holder thereof to receive from the Surviving Corporation as soon as administratively practicable following the Effective Time (in conjunction with the Surviving Corporation’s regular payroll process) an amount in cash equal to the product of (a) the Merger Consideration and (b) the number of vested units covered by such Company PSU that have not been settled or paid immediately prior to the Effective Time, less any applicable tax withholding. As of the Effective Time, each holder of Company PSUs will cease to have any rights with respect thereto, except for the right to receive the payment (if any) described in this paragraph.

The Merger Agreement provides that, as soon as administratively practicable after October 26, 2015, but no later than the day immediately prior to the date on which the first offering period that is regularly scheduled to commence under the Company Employee Stock Purchase Plan (the “Company ESPP”) after October 26, 2015, the Company will suspend the Company ESPP so that no further offering periods will commence after October 26, 2015. The Company has taken action to suspend the Company ESPP so that after the expiration of the current offering period of the Company ESPP, which began on October 1, 2015 and ends on December 31, 2015, no further offering periods will commence under the Company ESPP. With respect to the current offering period, each outstanding purchase right under the Company ESPP will be exercised in accordance with the terms of the Company ESPP on the regularly scheduled purchase date for the current offering period; provided that if the Effective Time occurs prior to December 31, 2015, then each outstanding right to purchase shares under the Company ESPP during the current offering period will be exercised immediately prior to the Effective Time. The Company is required to use reasonable best efforts to provide at least ten days’ prior written notice to each participant in the Company ESPP of such purchase. In connection with the Merger, all shares held in the brokerage account under the Company ESPP, as well as shares purchased under the last offering period of the Company ESPP, will, as of the Effective Time, be cancelled and converted into the right of the holder to receive from the Surviving Corporation as soon as administratively practicable following the Effective Time (in conjunction with the Surviving Corporation’s regular payroll process) an amount of cash equal to the product of (a) the Merger Consideration and (b) the total number of shares purchased under the Company ESPP by such participant. The Company Stock Plans and the Company ESPP will be terminated as of the Effective Time.

In connection with the Merger, each notional investment in shares under the Company Deferred Compensation Plan, as amended and restated effective as of January 31, 2014 (the “Company Deferred Compensation Plan”), whether or not vested, will, as of the Effective Time, become fully vested, and will, as of the Effective Time, be cancelled and converted into the right of the holder thereof to have allocated to the holder’s account under the Company Deferred Compensation Plan an amount of cash equal to the product of (a) the Merger Consideration and (b) the number of shares deemed invested under or otherwise referenced by such account

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immediately prior to the Effective Time. As of the Effective Time, each holder of notional investments in shares under the Company Deferred Compensation Plan will cease to have any rights with respect to such notional investments, except for the right to receive the allocation described in this paragraph. The Company will provide for the cancellation and conversion of the notional investments under the Company Deferred Compensation Plan described in this paragraph in accordance with the requirements of Treasury Regulation Section 1.409A-3(j)(4)(ix)(B).

In the Merger Agreement, the Company granted Purchaser an option (the “Top-Up Option”) to purchase, at a price per share equal to the Offer Price, an aggregate number of newly issued shares (the “Top-Up Shares”) equal to the lowest number of shares that, when added to the number of shares owned by Parent and its subsidiaries at the time of exercise of the Top-Up Option, will constitute one share more than 80% of the shares (calculated on a fully diluted basis in accordance with the Merger Agreement) then outstanding (after giving effect to the issuance of the Top-Up Shares). If following the Offer and the exercise, if any, of the Top-Up Option, Parent, Purchaser and their respective subsidiaries hold, in the aggregate, at least one share more than 80% of the shares (calculated on a fully diluted basis in accordance with the Merger Agreement), the parties have agreed to take all necessary and appropriate action to complete the Merger as soon as practicable, subject to the satisfaction or waiver of the remaining conditions under the Merger Agreement, in accordance with the “short form” procedures available under the Pennsylvania law.

At the closing of the purchase of Top-Up Shares, the aggregate purchase price owed by Purchaser to the Company for the Top-Up Shares will be paid to the Company at Parent’s election, either (x) entirely in cash, by wire transfer of same-day funds, or (y) by issuing to the Company an unsecured, non-negotiable, non-transferable promissory note having a principal amount equal to the aggregate purchase price pursuant to the Top-Up Option. Such promissory note (a) will bear interest at the applicable short-term federal rate per annum for U.S. income tax purposes, payable in arrears at maturity, (b) will mature on the first anniversary of the date of execution of the promissory note, (c) will be full recourse to Parent and Purchaser, (d) may be prepaid, at any time, in whole or in part, without premium or penalty, and (e) will have no other material terms. The Merger Agreement contains customary representations, warranties and covenants, including covenants obligating us to continue to conduct our business in the ordinary course and to cooperate in seeking regulatory approvals.

The foregoing description of the Merger Agreement is not complete and is qualified in its entirety by reference to the Merger Agreement, which was filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 26, 2015 and is incorporated herein by reference.

After careful consideration, including a thorough review of the terms and conditions of the Offer, the Company’s Board of Directors unanimously (a) determined that the Offer, the Merger and the other Transactions are fair to and in the best interests of the Company and its shareholders, (b) approved the Offer, the Merger and the other Transactions and adopted the Merger Agreement and (c) recommended that the shareholders of the Company accept the Offer and tender their shares pursuant to the Offer, and if required to consummate the Merger, that the shareholders of the Company adopt the Merger Agreement.

Additional information regarding the Merger, the Offer, and related matters, may be found in the Solicitation/Recommendation Statement on 14D-9, as amended (the “Schedule 14D-9”), and the Tender Offer Statement on Schedule TO, as amended, as filed by the Company and Parent and Purchaser, respectively, with the U.S. Securities & Exchange Commission.

Proposal from Icahn Enterprises L.P.

On December 4, 2015, Carl C. Icahn and affiliated entities (together, “Icahn”) filed a Schedule 13D disclosing its beneficial ownership of approximately 12% of the Company’s common stock. The Schedule 13D also disclosed that Icahn had engaged in prior discussions with the Company regarding Icahn’s interest in Pep Boys and, in particular, its retail business.  The “Background to the Offer” section of the Schedule 14D-9 describes the Company’s prior discussions with Icahn (referred to as “Party H” therein).

On December 4, 2015, Icahn also made an anti-trust filing under the HSR Act.  The notice disclosed Icahn’s “good faith intention,” dependent upon various factors including market conditions, to acquire in excess of a majority of the Company’s outstanding voting securities.

On December 7, 2015, the Company received a letter from Icahn Enterprises L.P. (“Icahn Enterprises”), in which Icahn Enterprises made a proposal (the “Icahn Proposal”) for a negotiated transaction whereby Icahn Enterprises would acquire all of the outstanding shares of common stock of the Company for $15.50 per share in cash.

On December 8, 2015, the Company announced that its Board of Directors, after consultation with its independent legal and financial advisors, had determined that the Icahn Proposal would reasonably be expected to result in a “Superior Proposal” as defined in the Merger Agreement.

This determination by the Company’s Board of Directors allows the Company to take certain actions, in accordance with the procedures set forth in the Merger Agreement, to further consider the Icahn Proposal.  In and of itself, however, this determination does not allow the Company to terminate the Merger Agreement, nor enter into a definitive transaction with Icahn Enterprises, both of which can also only occur in accordance with the procedures set forth in the Merger Agreement.

The Company’s Board of Directors has not changed its recommendation with respect to the Offer and the Merger, nor is it making any recommendation with respect to the Icahn Proposal.

There can be no assurance that the Company’s Board of Directors will ultimately determine that the Icahn Proposal is a Superior Proposal, that the terms of a transaction with Icahn Enterprises will be the same as those reflected in the Icahn Proposal or that any transaction with Icahn Enterprises will be agreed to or consummated.

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ITEM 2  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

The following discussion and analysis explains the results of operations for the third quarter of fiscal 2015 and 2014 and significant developments affecting our financial condition as of October 31, 2015. This discussion and analysis should be read in conjunction with the consolidated interim financial statements and the notes to such consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q, and the consolidated financial statements and the notes to such financial statements included in Item 8, “Financial Statements and Supplementary Data” of our Annual Report on Form 10-K for the fiscal year ended January 31, 2015.

Recent Developments

See notes to Consolidated Financial Statements in Note 15 for a discussion of the Agreement and Plan of Merger (the “Merger Agreement”) entered into on October 26, 2015 and the related agreements with by TAJ Acquisition Co., a Pennsylvania corporation (“Purchaser”), a wholly-owned subsidiary of Bridgestone Retail Operations, LLC, a Delaware limited liability company (“Parent”), a subsidiary of Bridgestone Americas, Inc. (“Bridgestone Americas”), and a discussion of a proposal from Icahn Enterprises to acquire all of our outstanding shares of common stock for $15.50 per share in cash.

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 18,000 associates are focused on delivering the best customer service in the automotive aftermarket to our customers across our over 800 locations throughout the United States and Puerto Rico and on-line at pepboys.com. 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 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 delivers 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.

In the first nine months of fiscal 2015, we opened four Service & Tire Centers and one Supercenter, and closed three Service & Tire Centers, three Supercenters and one Pep Express store. As of October 31, 2015, we operated 561 Supercenters, 238 Service & Tire Centers and five Pep Express stores located in 35 states and Puerto Rico.

EXECUTIVE SUMMARY

Net earnings for the third quarter of 2015 were $1.3 million, or $0.02 per share, as compared to a net loss of $2.0 million, or $0.03 per share, reported for the third quarter of 2014.

Total revenues decreased for the third quarter of 2015 by 1.8%, or $9.4 million, as compared to the third quarter of 2014 due to a 1.8% decrease in comparable store sales. This decrease in comparable store sales (sales generated by locations in operation during the same period of the prior year) was comprised of a 2.5% decrease in comparable store service revenues, and a 1.6% decrease in comparable store merchandise sales.

Various factors within the economy affect both our customers and trends in our industry, including the average age of vehicles, miles driven, new car sales, and per capita disposable income. 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, in our Supercenters and online at pepboys.com, the newest and broadest product assortment in the automotive aftermarket.

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 the market model that we call the “Road Ahead.” Designed around the shopping habits of our target customer segments, this model enhances the entire store—our people, the product assortment, its exterior and interior look and feel.

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RESULTS OF OPERATIONS

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

Analysis of Statement of Operations

Thirteen weeks ended October 31, 2015 vs. Thirteen weeks ended November 1, 2014

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.

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

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

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

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

Total revenue for the third quarter of 2015 decreased by $9.4 million, or 1.8%, to $508.1 million from $517.6 million for the third quarter of 2014. Comparable store sales for the third quarter of 2015 decreased by 1.8% as compared to the third quarter of 2014. This decrease in comparable store sales consisted of a 2.5% decrease in comparable store service revenue and a decrease of 1.6% in comparable store merchandise sales.

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 1.7%, or $6.8 million, to $389.1 million in the third quarter of fiscal 2015, compared to $395.9 million during the prior year quarter. Comparable store merchandise sales decreased by 1.6%, or $6.2 million, primarily due to a decline in comparable store transaction counts partially offset by a higher average revenue per transaction.

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Total service revenue decreased 2.2%, or $2.6 million, to $119.0 million in the third quarter of 2015 from $121.6 million during the prior year quarter. Comparable store service revenue decreased by 2.5%, or $3.1 million, primarily due to a decline in comparable store transaction counts partially offset by a higher average revenue per transaction. Non-comparable stores contributed an additional $0.4 million of service revenue during the quarter.

In our retail business (as defined below in Industry Comparison), continued competitive pressures led to a comparable store transaction count decline of 5.5%, while higher selling prices resulted in a 3.4% increase in average revenue per transaction.

In our service business (as defined below in Industry Comparison), we believe that the decline in comparable store transaction counts of 5.9% was primarily due to reduced demand for heavier undercar car (i.e. shocks and struts) and engine performance services. Service average revenue per transaction increased by 4.8%, primarily due to higher selling prices and a shift in sales mix to higher priced tires.

Total gross profit decreased by $0.5 million, or 0.5%, to $117.8 million in the third quarter of 2015 from $118.3 million in the third quarter of 2014. Total gross profit margin increased to 23.2% for the third quarter of 2015 from 22.9% for the third quarter of 2014. Excluding the impairment charge of $0.8 million and $1.4 million in the third quarter of 2015 and 2014, respectively, total gross profit margin increased by 20 basis points to 23.3% for fiscal 2015 from 23.1% in fiscal 2014. The increase in total gross profit margin was primarily due to lower store occupancy and warehousing costs.

Gross profit from merchandise sales decreased by $1.1 million, or 1.0%, to $116.0 million for the third quarter of 2015 from $117.1 million in the third quarter of 2014. Gross profit margin from merchandise sales increased to 29.8% for the third quarter of 2015 from 29.6% for the third quarter of 2014. Excluding the impairment charge of $0.5 million and $0.3 million in the third quarter of 2015 and 2014, respectively, gross profit margin from merchandise sales increased by 20 basis points to 29.9% for fiscal 2015 from 29.7% in fiscal 2014. The increase in gross profit margin was primarily due to a decrease in store occupancy costs of 40 basis points and a decrease in freight costs of 10 basis points offset by lower gross product margins of 30 basis points.

Gross profit from service revenue increased by $0.6 million, or 50.3%, to $1.8 million in the third quarter of 2015 from $1.2 million in the third quarter of 2014. Gross profit margin from service revenue increased to 1.5% for the third quarter of 2015 from 1.0% for the third quarter of 2014. In accordance with GAAP, service revenue is limited to labor sales (excludes any revenue from installed parts and materials) and costs of service revenue includes the fully loaded service center payroll and related employee benefits, and service center occupancy costs (rent, utilities and building maintenance). Excluding the impairment charge of $0.3 million and $1.1 million in the third quarter of 2015 and 2014, respectively, gross profit margin from service revenue declined 15 basis points period over period. The decrease in service revenue gross margin was primarily due to the deleveraging effect of lower sales on the fixed component of payroll and related costs and occupancy costs.

Selling, general and administrative expenses as a percentage of total revenues increased to 23.5% for the third quarter of 2015 from 22.7% for the third quarter of 2014 totaling $119.4 million in the third quarter of 2015 and $117.7 million in the prior year quarter primarily due to $2.9 million in merger and acquisition expense and $1.3 million in legal expense, offset by a reduction of $1.4 million in media expense.

In the third quarter of fiscal 2015, we sold two locations for a gain of $6.0 million.

Interest expense for the third quarter of 2015 was $3.2 million, a decrease of $0.3 million compared to the $3.5 million reported for the third quarter of 2014.

Our income tax expense for the third quarter of 2015 was $0.5 million, or an effective rate of 30.7%, as compared to a benefit of $0.7 million, or an effective rate of 29.0% in the third quarter of 2014. The increase in the effective tax rate was primarily due to a change in the mix of pre-tax earnings (loss) within certain jurisdictions and the impact of permanent tax differences in relation to pre-tax earnings (loss).

As a result of the foregoing, we reported net income of $1.3 million in the third quarter of 2015 as compared to net loss of $2.0 million in the prior year quarter. Our basic and diluted earnings per share were $0.02 for the third quarter of 2015 as compared to a loss of $0.03 for the third quarter of 2014.

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Thirty-nine weeks ended October 31, 2015 vs. Thirty-nine weeks ended November 1, 2014

The following table presents for the periods indicated certain items in the consolidated statements of operations and comprehensive income 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.