Item 2. Managements
Discussion and Analysis of Financial Condition and Results of Operations
The discussion and analysis below should be read
in conjunction with (i) the condensed consolidated interim financial statements
and the notes to such financial statements included elsewhere in this Form 10-Q
and (ii) 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 February 3, 2007.
OVERVIEW
The Pep Boys - Manny, Moe & Jack is a
leader in the automotive aftermarket with 592 stores located throughout 36
states and Puerto Rico. All of our stores feature the nationally-recognized Pep
Boys brand name, established through more than 80 years of providing
high-quality automotive merchandise and services, and are company-owned,
ensuring chain-wide consistency for our customers. We are the only national
chain offering automotive service, accessories, tires and parts under one roof,
positioning us to achieve our goal of becoming the category dominant one-stop
shop for automotive maintenance products and services.
For the thirteen weeks ended August 4, 2007, our
comparable sales (sales generated by locations in operation during the same
period) decreased by 3.6% compared to an increase of 0.4% for the thirteen
weeks ended July 29, 2006. This decrease in comparable sales consisted of a
5.1% decrease in comparable merchandise sales which was partially offset by a
3.8% increase in comparable service revenue. Comparable merchandise sales
declined primarily due to the elimination of commercial delivery in fifty-five
locations and fewer promotional offerings, while comparable service revenues
were driven by an increased focus of the Companys advertising to service
offerings and opportunistic pricing initiatives.
Our net earnings for the second quarter of 2007
were $4,179,000 or $2,827,000 higher than the $1,352,000 net earnings for the
second quarter of 2006. This increase in profitability was primarily due to
improved service revenue margins and expense control initiatives, which were
partially offset by fewer asset sales.
The following discussion explains the material
changes in our results of operations for the thirteen (second quarter) and
twenty-six weeks ended August 4, 2007 and the significant developments
affecting our financial condition since February 3, 2007. We strongly recommend
that you read the audited consolidated financial statements and footnotes and
Managements Discussion and Analysis of Financial Condition and Results of
Operations included in our Annual Report on Form 10-K for the fiscal year ended
February 3, 2007.
LIQUIDITY AND CAPITAL RESOURCES August 4, 2007
Our cash requirements arise principally from the
purchase of inventory and capital expenditures related to existing stores,
offices and warehouses and information systems. The capital expenditures for
the twenty-six weeks ended August 4, 2007 were primarily for store maintenance
and improvements. During the twenty-six weeks ended August 4, 2007, we invested
approximately $18,345,000 in property and equipment versus $16,123,000 invested
in the second quarter of fiscal 2006. We estimate that capital expenditures
related to existing stores, warehouses and offices and information systems
during fiscal 2007 will be approximately $45,000,000 to $55,000,000.
During the second quarter of 2007, we received
$26,129,000 from the surrender of certain company-owned life insurance
policies. The proceeds from the surrender of these non-core assets were used to
repay borrowings under the Companys revolving credit facility. In fiscal 2006,
the Company received $6,981,000 from the sale of one of its stores.
We anticipate that our net cash provided by
operating activities and our existing revolving credit facility will exceed our
principal cash requirements for capital expenditures and inventory purchases in
fiscal 2007. We have no material debt maturities due within the next twelve
months.
During the second quarter of fiscal 2007, we
completed a valuation of our owned store and distribution center
properties. We plan to begin to monetize
a portion of these assets during the second half of fiscal 2007 through
sale/leaseback transactions, with the initial use of proceeds expected to be
the repayment of debt.
Working Capital increased from $163,960,000 at
February 3, 2007 to $197,436,000 at August 4, 2007. At August 4, 2007, we had
stockholders equity of $528,873,000 and long-term debt, net of current
maturities, of $548,882,000. Our long-term debt was approximately 51% of our
total capitalization at August 4, 2007 and 49% at February 3,
19
2007. As of August 4, 2007, we had further
undrawn availability under our revolving credit facility totaling $174,000,000.
On June 29, 2007, the Company entered into a new
$65,000,000 vendor financing program with JPMorgan Chase Bank, National
Association that will replace our previous $20,000,000 vendor financing program
once the final scheduled payments factored under this program are made in
December 2007. Under these programs, the Companys factor makes accelerated and
discounted payments to our vendors and the Company, in turn, makes its
regularly scheduled full vendor payments to the factor. As of August 4, 2007,
the Company had an outstanding balance of $13,016,000 under these programs,
classified as trade payable program liability in the consolidated balance
sheet.
CONTRACTUAL OBLIGATIONS
The following charts represent our total
contractual obligations and commercial commitments as of August 4, 2007:
Contractual Obligations (2)(3)
(dollar amounts in thousands)
|
|
Total
|
|
Due in less
than 1 year
|
|
Due in
13 years
|
|
Due in
35 years
|
|
Due after
5 years
|
|
Long-term debt
(1)
|
|
$
|
551,795
|
|
$
|
3,224
|
|
$
|
39,555
|
|
$
|
6,400
|
|
$
|
502,616
|
|
Operating leases
|
|
457,172
|
|
61,297
|
|
94,408
|
|
89,912
|
|
211,555
|
|
Asset purchase
obligation under operating lease
|
|
116,505
|
|
116,505
|
|
|
|
|
|
|
|
Expected
scheduled interest payments on all longterm debt
|
|
277,749
|
|
40,935
|
|
81,161
|
|
74,749
|
|
80,904
|
|
Capital leases
|
|
556
|
|
245
|
|
311
|
|
|
|
|
|
Total cash obligations
|
|
$
|
1,403,777
|
|
$
|
222,206
|
|
$
|
215,435
|
|
$
|
171,061
|
|
$
|
795,075
|
|
(1) Long-term debt
includes current maturities.
(2) The contractual
obligations table excludes our defined benefit pension obligation. Future plan
contributions are dependent upon actual plan asset returns and interest rates.
For the thirteen weeks ended August 4, 2007, the Company contributed $300,000
of an anticipated $3,300,000 aggregate contribution during fiscal 2007, to its
non-qualified defined benefit pension plan.
(3) The contractual
obligations table excludes the Companys FIN 48 liabilities of $3,037,000
because the Company cannot make a reliable estimate of the timing of the
related cash payments.
Commercial Commitments
|
|
|
|
Due in less
|
|
Due in
|
|
Due in
|
|
Due after
|
|
(dollar amounts in thousands)
|
|
Total
|
|
than 1 year
|
|
13 years
|
|
35 years
|
|
5 years
|
|
Import letters
of credit
|
|
$
|
315
|
|
$
|
115
|
|
$
|
200
|
|
$
|
|
|
$
|
|
|
Standby letters
of credit
|
|
63,065
|
|
51,335
|
|
11,730
|
|
|
|
|
|
Surety bonds
|
|
10,552
|
|
2,363
|
|
8,189
|
|
|
|
|
|
Purchase obligations
(1)(2)
|
|
7,308
|
|
7,308
|
|
|
|
|
|
|
|
Total commercial
commitments
|
|
$
|
81,240
|
|
$
|
61,121
|
|
$
|
20,119
|
|
$
|
|
|
$
|
|
|
(1) Our open
purchase orders are based on current inventory or operational needs and are
fulfilled by our vendors within short periods of time. We currently do not have
minimum purchase commitments under our vendor supply agreements 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 vendors at
August 4, 2007 are considered to be a contractual obligation.
(2) In the first quarter
of fiscal 2005, we entered into a contractual commitment to purchase
approximately $4,800,000 of products over a six-year period. The commitment for
years two through five is approximately $950,000 per year, while the final years
commitment is approximately half that amount. Following year two, we are
obligated to pay the vendor a per unit fee if there is a shortfall between our
cumulative purchases during the two year period and the minimum purchase
requirement. For years three through six, we are obligated to pay the vendor a
per unit fee for any annual shortfall. The maximum annual obligation under any
shortfall is approximately $950,000. At August 4, 2007, we expect to meet the
cumulative minimum purchase requirements under this contract. Accordingly, no
amounts attributable to this contractual commitment are included in the table.
DISCONTINUED OPERATIONS
In accordance with SFAS No. 144, our
discontinued operations continues to reflect the costs associated with the
stores remaining from the 33 stores closed on July 31, 2003 as part of our
corporate restructuring. The remaining reserve balance is immaterial.
20
During the second quarter of fiscal 2006, we
sold a store that we leased back and continue to operate. Due to our
significant continuing involvement with this store following the sale, we
reclassified back into continuing operations, for all periods presented, this
stores revenues and costs that had been previously classified into
discontinued operations during the third quarter of fiscal 2005, in accordance
with SFAS No. 144 and EITF No. 03-13.
RESULTS OF OPERATIONS
Thirteen Weeks Ended
August 4, 2007 vs. Thirteen Weeks Ended July 29, 2006
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 of Total Revenues
|
|
Percentage Change
|
|
Thirteen weeks ended
|
|
August 4, 2007
(Fiscal 2007)
|
|
July 29, 2006
(Fiscal 2006)
|
|
Favorable
(Unfavorable)
|
|
|
|
|
|
|
|
|
|
Merchandise
Sales
|
|
82.1
|
%
|
83.3
|
%
|
(4.9
|
)%
|
Service Revenue
(1)
|
|
17.9
|
|
16.7
|
|
3.9
|
|
Total Revenues
|
|
100.0
|
|
100.0
|
|
(3.4
|
)
|
Costs of
Merchandise Sales (2)
|
|
69.7
|
(3)
|
71.1
|
(3)
|
6.7
|
|
Costs of Service
Revenue (2)
|
|
88.7
|
(3)
|
93.8
|
(3)
|
1.8
|
|
Total Costs of
Revenues
|
|
73.1
|
|
74.9
|
|
5.7
|
|
Gross Profit
from Merchandise Sales
|
|
30.3
|
(3)
|
28.9
|
(3)
|
(0.3
|
)
|
Gross Profit
from Service Revenue
|
|
11.3
|
(3)
|
6.2
|
(3)
|
90.1
|
|
Total Gross
Profit
|
|
26.9
|
|
25.1
|
|
3.5
|
|
Selling, General
and Administrative Expenses
|
|
23.8
|
|
24.1
|
|
4.8
|
|
Net (Loss) Gain
from Dispositions of Assets
|
|
|
|
1.1
|
|
(100.2
|
)
|
Operating Profit
|
|
3.1
|
|
2.1
|
|
44.1
|
|
Non-operating
Income
|
|
0.3
|
|
0.3
|
|
(12.5
|
)
|
Interest Expense
|
|
2.2
|
|
2.1
|
|
(3.0
|
)
|
Earnings from
Continuing Operations Before Income Taxes and Cumulative Effect of Change in
Accounting Principle
|
|
1.2
|
|
0.4
|
|
229.2
|
|
Income Tax
Expense
|
|
37.5
|
(4)
|
27.9
|
(4)
|
(342.4
|
)
|
Net Earnings
from Continuing Operations Before Cumulative Effect of Change in Accounting
Principle
|
|
0.8
|
|
0.3
|
|
185.4
|
|
Discontinued
Operations, Net of Tax
|
|
|
|
|
|
NM
|
|
Cumulative
Effect of Change in Accounting Principle, Net of Tax
|
|
|
|
|
|
NM
|
|
Net Earnings
|
|
0.7
|
|
0.2
|
|
209.1
|
|
(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
Earnings from Continuing Operations Before Income Taxes and Cumulative Effect
of Change in Accounting Principle.
NM: Not Meaningful
Total revenues for the second quarter decreased
3.4%, with a 3.6% comparable revenues decrease, resulting primarily from a
decline in retail and commercial merchandise sales. Comparable merchandise
sales decreased 5.1%, while comparable service revenue increased 3.8%. The
decline in merchandise sales was due primarily to the removal of commercial
delivery from fifty-five stores and fewer promotional offerings. Service
revenues were driven by an increased focus of the Companys advertising to service
offerings and opportunistic retail price increases.
21
While gross profit from merchandise sales was
$354,000 lower in fiscal 2007 than in fiscal 2006, gross profit as a percentage
of merchandise sales increased to 30.3% in fiscal 2007 from 28.9% in fiscal
2006. This product margin improvement resulted primarily from improved
merchandise acquisition costs, sales of a more favorable (higher gross margin)
mix of merchandise and opportunistic pricing initiatives.
Gross profit from service revenue increased, as
a percentage of service revenue to 11.3% in fiscal 2007 from 6.2% in fiscal
2006. This was a 90.1% or $5,390,000 increase from the prior year. This
increase, as a percentage of service revenue, was due primarily to increased
leverage of fixed expenses, lower employee benefit expenses and favorable
workers compensation experience.
Selling, general and administrative expenses, as
a percentage of total revenues, were 23.8% and 24.1% in fiscal 2007 and fiscal
2006, respectively. This 4.8% or $6,699,000 decrease from the prior year
resulted primarily from lower payroll and improving workers compensation
experience. Fiscal year 2007 reflects $800,000 in outsourcing-related severance
charges while fiscal year 2006 reflects a $2,100,000 favorable litigation settlement,
a $1,100,000 severance charge for the Companys former CEO and $1,400,000 in
strategic review costs.
Net (loss) gain from dispositions of assets
decreased from the prior year, as no stores were sold in the second quarter of
fiscal 2007. A $6,329,000 gain resulting from a store sale was recorded in the
second quarter of fiscal 2006.
Income tax expense for the second quarter of
2007 reflects a $4,227,000 tax benefit resulting from the favorable settlement
of a previously uncertain tax position, which was partially offset by higher
annual tax rate as a result of a taxable gain on the surrender of certain
company-owned life insurance policies.
Net earnings of
$4,179,000 for the second quarter, improved $2,827,000 from the prior
year primarily due to improved service revenue margins and lower selling,
general and administrative expenses, which were partially offset by fewer asset
sales.
Twenty-six Weeks Ended August 4, 2007 vs.
Twenty-six Weeks Ended July 29, 2006
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 of Total Revenues
|
|
Percentage Change
|
|
Twenty-six weeks ended
|
|
August 4, 2007
(Fiscal 2007)
|
|
July 29, 2006
(Fiscal 2006)
|
|
Favorable
(Unfavorable)
|
|
Merchandise
Sales
|
|
81.8
|
%
|
82.7
|
%
|
(3.8
|
)%
|
Service Revenue
(1)
|
|
18.2
|
|
17.3
|
|
2.8
|
|
Total Revenues
|
|
100.0
|
|
100.0
|
|
(2.7
|
)
|
Costs of
Merchandise Sales (2)
|
|
70.3
|
(3)
|
71.6
|
(3)
|
5.5
|
|
Costs of Service
Revenue (2)
|
|
88.4
|
(3)
|
91.3
|
(3)
|
0.5
|
|
Total Costs of
Revenues
|
|
73.6
|
|
75.0
|
|
4.5
|
|
Gross Profit
from Merchandise Sales
|
|
29.7
|
(3)
|
28.4
|
(3)
|
0.6
|
|
Gross Profit
from Service Revenue
|
|
11.6
|
(3)
|
8.7
|
(3)
|
37.1
|
|
Total Gross
Profit
|
|
26.4
|
|
25.0
|
|
2.8
|
|
Selling, General
and Administrative Expenses
|
|
23.6
|
|
23.9
|
|
3.6
|
|
Net Gain from
Dispositions of Assets
|
|
0.2
|
|
0.5
|
|
(61.0
|
)
|
Operating Profit
|
|
3.0
|
|
1.7
|
|
73.5
|
|
Non-operating
Income
|
|
0.3
|
|
0.4
|
|
(14.2
|
)
|
Interest Expense
|
|
2.3
|
|
2.0
|
|
(12.0
|
)
|
Earnings from
Continuing Operations Before Income Taxes and Cumulative Effect of Change in
Accounting Principle
|
|
1.1
|
|
0.1
|
|
900.9
|
|
Income Tax
Expense
|
|
38.4
|
(4)
|
49.9
|
(4)
|
(670.8
|
)
|
Net Earnings
from Continuing Operations Before Cumulative Effect of Change in Accounting
Principle
|
|
0.7
|
|
0.1
|
|
1,129.9
|
|
Discontinued
Operations, Net of Tax
|
|
|
|
|
|
NM
|
|
Cumulative
Effect of Change in Accounting Principle, Net of Tax
|
|
|
|
|
|
NM
|
|
Net Earnings
|
|
0.7
|
|
0.1
|
|
1,033.1
|
|
22
(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
Earnings from Continuing Operations Before Income Taxes and Cumulative Effect
of Change in Accounting Principle.
NM: Not Meaningful
Total revenues for the first twenty-six weeks of
fiscal 2007 decreased 2.7%, with a 3.0% comparable revenues decrease, resulting
primarily from a decline in retail and commercial merchandise sales. Comparable
merchandise sales decreased 4.1%, while comparable service revenue increased
2.6%. The decline in merchandise sales was primarily due to the removal of
commercial delivery from fifty-five stores and fewer promotional offerings.
Gross profit as a percentage of merchandise
sales increased to 29.7% in fiscal 2007 from 28.4% in fiscal 2006. This was a
0.6% or $1,604,000 increase from the prior year. This increase resulted
primarily from improved merchandise acquisition costs, favorable (higher gross
margin) mix of merchandise, opportunistic
retail price increases and a $1,300,000 gain on the settlement of an inventory
insurance claim resulting from Hurricane Katrina.
Gross profit from service revenue increased, as
a percentage of service revenue to 11.6% in fiscal 2007 from 8.7% in fiscal
2006. This was a 37.1% or $6,346,000 increase from the prior year. This
increase, as a percentage of service revenue, was due primarily to increased
leverage of fixed expenses.
Selling, general and administrative expenses, as
a percentage of total revenues, were 23.6% and 23.9% in fiscal 2007 and fiscal
2006, respectively. This 3.6% or $9,848,000 decrease from the prior year
resulted primarily from lower store payroll and employee benefits costs,
favorable workers compensation experience and reduced media expense. Fiscal
year 2007 reflects a $3,900,000 CEO transition charge and $800,000 in
outsourcing-related severance charges, while fiscal year 2006 reflects a
$2,300,000 favorable insurance settlement, a $2,100,000 favorable litigation
settlement, a $1,100,000 severance charge for the Companys former CEO and
$2,775,000 in strategic review costs.
Net gain from dispositions of assets decreased
$3,672,000 from the prior year. While no stores were sold in fiscal 2007, the
Company did record a $2,400,000 gain due to the settlement of an insurance
claim relating to stores impaired during Hurricane Katrina in 2005. Fiscal 2006
reflects a $6,329,000 gain from the sale of a store recorded in the second
quarter of fiscal 2006.
Interest expense increased $2,682,000 due to an
increase in the Companys weighted average interest rate and higher debt
levels.
Net earnings improved by $6,705,000 from the
prior fiscal year, primarily due to improved service revenue margins and lower
selling, general and administrative expenses, which were partially offset by
fewer asset sales and higher interest expense.
23
INDUSTRY COMPARISON
We operate in the U.S. automotive aftermarket,
which has two general competitive arenas: Do-It-For-Me (DIFM) (service labor,
installed merchandise and tires) market and the Do-It-Yourself (DIY) (retail
merchandise) market. Generally, the specialized automotive retailers focus on
either the DIY or DIFM areas of the business. We believe that our operation
in both the DIY and DIFM areas of the business positively differentiates us
from most of our competitors. Although we manage our store performance at a
store level in aggregation, we believe that the following presentation shows a
representative comparison against competitors within the two sales arenas. We
compete in the DIY area of the business through our retail sales floor and
commercial sales business (Retail Sales). Our Service Center Business (labor
and installed merchandise and tires) competes in the DIFM area of the
industry.
The following table presents the revenues and
gross profit for each area of the business.
|
|
Thirteen Weeks Ended
|
|
Twenty-six Weeks Ended
|
|
|
|
August 4,
|
|
July 29,
|
|
August 4,
|
|
July 29,
|
|
(Dollar amounts in thousands)
|
|
2007
|
|
2006
|
|
2007
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Retail Sales (1)
|
|
$
|
322,464
|
|
$
|
353,554
|
|
$
|
637,167
|
|
$
|
681,511
|
|
Service Center
Revenue (2)
|
|
236,425
|
|
225,011
|
|
467,735
|
|
453,655
|
|
Total Revenues
|
|
$
|
558,889
|
|
$
|
578,565
|
|
$
|
1,104,902
|
|
$
|
1,135,166
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
from Retail Sales (3)
|
|
$
|
93,141
|
|
$
|
100,179
|
|
$
|
182,885
|
|
$
|
189,768
|
|
Gross Profit from
Service Center Revenue (3)
|
|
56,997
|
|
44,923
|
|
109,045
|
|
94,212
|
|
Total Gross
Profit
|
|
$
|
150,138
|
|
$
|
145,102
|
|
$
|
291,930
|
|
$
|
283,980
|
|
(1) Excludes revenues
from installed products.
(2) Includes revenues
from installed products.
(3) Gross Profit from
Retail Sales includes the cost of products sold, buying, warehousing and store
occupancy costs. 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.
NEW ACCOUNTING STANDARDS
TO BE ADOPTED
In September 2006, the FASB issued SFAS
No. 157, Fair Value Measurements (SFAS No. 157). SFAS No. 157
defines the term fair value, establishes a framework for measuring it within
generally accepted accounting principles and expands disclosures about its
measurements. SFAS No. 157 is effective for financial statements issued
for fiscal years beginning after November 15, 2007. We are currently
evaluating the impact of SFAS No. 157 on our consolidated financial
statements.
In February 2007, the FASB issued SFAS
No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities (SFAS No. 159). SFAS No. 159 permits entities to choose to
measure many financial instruments and certain other items at fair value. SFAS
No. 159 is effective for fiscal years beginning after November 15,
2007. We are currently evaluating the impact of SFAS No. 159 on our consolidated
financial statements.
In March 2007, the EITF reached a consensus
on Issue Number 06-10, Accounting for Deferred Compensation and Postretirement
Benefit Aspects of Collateral Assignment Split-Dollar Life Insurance
Arrangements, (EITF 06-10). EITF 06-10 provides guidance to help companies
determine whether a liability for the postretirement benefit associated with a
collateral assignment split-dollar life insurance arrangement should be recorded
in accordance with either SFAS No. 106, Employers Accounting for
Postretirement Benefits Other Than Pensions (if, in substance, a
postretirement benefit plan exists), or Accounting Principles Board Opinion No.
12 (if the arrangement is, in substance, an individual deferred compensation
contract). EITF 06-10 also provides guidance on how a company should recognize
and measure the asset in a collateral assignment split-dollar life insurance
contract. EITF 06-10 is effective for fiscal years beginning after
December 15, 2007, although early adoption is permitted. We are currently
evaluating the impact of EITF 06-10 on our consolidated financial statements.
24
In June 2007, the FASB ratified EITF Issue
Number 06-11, Accounting for Income Tax Benefits of Dividends on
Share-Based Payment Awards (EITF 06-11). EITF 06-11 applies to share-based
payment arrangements with dividend protection features that entitle employees
to receive (a) dividends on equity-classified nonvested shares,
(b) dividend equivalents on equity-classified nonvested share units, or
(c) payments equal to the dividends paid on the underlying shares while an
equity-classified share option is outstanding, when those dividends or dividend
equivalents are charged to retained earnings under SFAS No. 123(R), Share-Based
Payment, and result in an income tax deduction for the employer. A consensus
was reached that a realized income tax benefit from dividends or dividend
equivalents that are charged to retained earnings and are paid to employees for
equity-classified non-vested equity shares, non-vested equity share units, and
outstanding equity share options should be recognized as an increase in
additional paid-in capital. EITF 06-11 is effective prospectively for the
income tax benefits that result from dividends on equity-classified employee
share-based payment awards that are declared in fiscal years beginning after
December 15, 2007, and interim periods within those fiscal years. We are
currently evaluating the impact of EITF 06-11 on our consolidated financial
statements.
CRITICAL ACCOUNTING
POLICIES AND ESTIMATES
Managements Discussion and Analysis of
Financial Condition and Results of Operations discusses our condensed
consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of America. The
preparation of these financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the
condensed consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Additionally, the Company
estimates its interim product gross margins in accordance with Accounting
Principles Bulletin No. 28, Interim Financial Reporting.
On an on-going basis, we evaluate our estimates
and judgments, including those related to customer incentives, product returns
and warranty obligations, bad debts, inventories, income taxes, financing
operations, restructuring costs, retirement benefits, risk participation
agreements and contingencies and litigation. We base our estimates and
judgments on historical experience and on various other factors that 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. For a detailed
discussion of significant accounting policies that may involve a higher degree
of judgment or complexity, refer to Critical Accounting Policies and Estimates
as reported in our Form
10-K for the fiscal year ended February 3, 2007, which disclosures are hereby
incorporated by reference.
FORWARD-LOOKING
STATEMENTS
Certain statements contained herein constitute forward-looking
statements within the meaning of The Private Securities Litigation Reform Act
of 1995. The words guidance, expect, anticipate, estimates, forecasts
and similar expressions are intended to identify such forward-looking
statements. Forward-looking statements include managements expectations
regarding future financial performance, automotive aftermarket trends, levels
of competition, business development activities, future capital expenditures,
financing sources and availability and the effects of regulation and
litigation. Although we believe that the expectations reflected in such
forward-looking statements are based on reasonable assumptions, we can give no
assurance that our expectations will be achieved. Our actual results may differ
materially from the results discussed in the forward-looking statements due to
factors beyond our control, including the strength of the national and regional
economies, retail and commercial consumers ability to spend, the health of the
various sectors of the automotive aftermarket, the weather in geographical
regions with a high concentration of our stores, competitive pricing, the
location and number of competitors stores, product and labor costs and the
additional factors described in our filings with the Securities and Exchange
Commission (SEC). We assume no obligation to update or supplement
forward-looking statements that become untrue because of subsequent events.