Table of
Contents
UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM 10-Q
(Mark One)
x
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|
Quarterly Report Pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934
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For the quarterly period ended May 2, 2009
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OR
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|
o
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Transition Report Pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934
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For the
transition period from
to
Commission
File No. 1-3381
The Pep
Boys - Manny, Moe & Jack
(Exact name of registrant as specified in
its charter)
Pennsylvania
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23-0962915
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(State or other jurisdiction of
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(I.R.S. Employer ID number)
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incorporation or organization)
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3111 W. Allegheny Ave. Philadelphia, PA
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19132
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(Address of principal executive offices)
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(Zip code)
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215-430-9000
(Registrants telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities and Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to
such filing requirements for the past 90 days. Yes
x
No
o
Indicate by check mark
whether the registrant has submitted electronically and posted on its corporate
Website, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files).
Yes
o
No
o
Indicate
by checkmark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of large accelerated filer, accelerated filer and smaller
reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer
o
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Accelerated filer
x
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Non-accelerated filer
o
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Smaller reporting company
o
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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 May 29, 2009 there were 52,302,443
shares of the registrants Common Stock outstanding.
Table of Contents
PART I
- FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial
Statements (Unaudited)
THE PEP BOYS - MANNY, MOE & JACK
AND SUBSIDIARIES
CONDENSED CONSOLIDATED
BALANCE SHEETS
(dollar amounts in thousands, except
share data)
UNAUDITED
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|
May 2, 2009
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January 31, 2009
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ASSETS
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Current Assets:
|
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Cash and cash equivalents
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$
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21,313
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$
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21,332
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Accounts receivable, less allowance for
uncollectible accounts of $1,701 and $1,912
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22,680
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28,831
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Merchandise inventories
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556,564
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564,931
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Prepaid expenses
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21,661
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25,390
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Other
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58,757
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62,421
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Assets held for disposal
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11,004
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12,653
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Total Current Assets
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691,979
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715,558
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Property and Equipment - net
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724,698
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740,331
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Deferred income taxes
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77,606
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77,708
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Other
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17,477
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18,792
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Total Assets
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$
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1,511,760
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$
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1,552,389
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LIABILITIES AND STOCKHOLDERS
EQUITY
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Current Liabilities:
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Accounts payable
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$
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193,894
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$
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212,340
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Trade payable program liability
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28,464
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31,930
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Accrued expenses
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244,764
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254,754
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Deferred income taxes
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38,540
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35,848
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Current maturities of long-term debt and
obligations under capital lease
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1,150
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1,453
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Total Current Liabilities
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506,812
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536,325
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Long-term debt and obligations under capital
lease, less current maturities
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332,848
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352,382
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Other long-term liabilities
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70,745
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70,322
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Deferred gain from asset sales
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167,984
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170,204
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Commitments and Contingencies
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Stockholders Equity:
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Common Stock, par value $1 per share:
|
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Authorized 500,000,000 shares; Issued 68,557,041
shares
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68,557
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68,557
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Additional paid-in capital
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292,434
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292,728
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Retained earnings
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367,882
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358,670
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Accumulated other comprehensive loss
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(17,823
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)
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(18,075
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)
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Less cost of shares in treasury 14,059,333
shares and 14,124,021 shares
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218,415
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219,460
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Less cost of shares in benefits trust - 2,195,270
shares
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59,264
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59,264
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Total Stockholders Equity
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433,371
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423,156
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Total Liabilities and Stockholders Equity
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$
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1,511,760
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$
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1,552,389
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See
notes to condensed consolidated financial statements.
2
Table
of Contents
THE PEP BOYS - MANNY, MOE & JACK
AND SUBSIDIARIES
CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
AND CHANGES IN RETAINED
EARNINGS
(dollar amounts in thousands, except per
share amounts)
UNAUDITED
Thirteen weeks ended
|
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May 2, 2009
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May 3, 2008
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Merchandise Sales
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$
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398,177
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$
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403,334
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Service Revenue
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98,311
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94,709
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Total Revenues
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496,488
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498,043
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Costs of Merchandise Sales
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281,035
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285,923
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Costs of Service Revenue
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85,852
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84,154
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Total Costs of Revenues
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366,887
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370,077
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Gross Profit from Merchandise Sales
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117,142
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117,411
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Gross Profit from Service Revenue
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12,459
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10,555
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Total Gross Profit
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129,601
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127,966
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Selling, General and Administrative Expenses
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108,053
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119,015
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Net Gain from Dispositions of Assets
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3
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5,531
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|
Operating Profit
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21,551
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14,482
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Non-operating Income
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403
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330
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Interest Expense
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1,936
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5,427
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Earnings From Continuing Operations Before Income
Taxes
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20,018
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9,385
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Income Tax Expense
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8,955
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4,094
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Net Earnings From Continuing Operations
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11,063
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5,291
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Loss From Discontinued Operations, Net of Tax
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(154
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)
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(619
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)
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Net Earnings
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10,909
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4,672
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Retained Earnings, beginning of period
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358,670
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406,819
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Cumulative effect adjustment for adoption of EITF
06-10, net of tax
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(1,165
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)
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Cash Dividends
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(1,575
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)
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(3,495
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)
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Effect of Stock Options
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(12
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)
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Dividend Reinvestment Plan
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(122
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)
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Retained Earnings, end of period
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$
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367,882
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$
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406,819
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Basic Earnings Per Share:
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|
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Net Earnings from Continuing Operations
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$
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0.21
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$
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0.10
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Discontinued Operations, Net of Tax
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|
|
|
(0.01
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)
|
Basic Earnings Per Share
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$
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0.21
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$
|
0.09
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|
|
|
|
|
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Diluted Earnings Per Share:
|
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|
|
|
|
|
|
|
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Net Earnings from Continuing Operations
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$
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0.21
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$
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0.10
|
|
Discontinued Operations, Net of Tax
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|
|
(0.01
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)
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Diluted Earnings Per Share
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$
|
0.21
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$
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0.09
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|
|
|
|
|
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Cash Dividends Per Share
|
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$
|
0.03
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$
|
0.0675
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|
See
notes to condensed consolidated financial statements.
3
Table of Contents
THE PEP BOYS - MANNY,
MOE & JACK AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollar amounts in
thousands)
UNAUDITED
Thirteen weeks ended
|
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May 2, 2009
|
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May 3, 2008
|
|
Cash Flows from Operating Activities:
|
|
|
|
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|
Net Earnings
|
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$
|
10,909
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$
|
4,672
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|
Adjustments to reconcile net earnings to net cash
used in continuing operations:
|
|
|
|
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|
Net loss from discontinued operations
|
|
154
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|
619
|
|
Depreciation and amortization
|
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17,373
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|
19,019
|
|
Amortization of deferred gain from asset sales
|
|
(3,049
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)
|
(1,825
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)
|
Stock compensation expense
|
|
568
|
|
1,322
|
|
Gain on debt retirement
|
|
(6,248
|
)
|
(2,883
|
)
|
Deferred income taxes
|
|
2,646
|
|
1,437
|
|
Gain from dispositions of assets
|
|
(3
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)
|
(5,531
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)
|
Other
|
|
181
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|
1,511
|
|
Changes in Operating Assets and Liabilities:
|
|
|
|
|
|
Decrease in accounts receivable, prepaid expenses
and other
|
|
14,603
|
|
7,586
|
|
Decrease (increase) in merchandise inventories
|
|
8,366
|
|
(287
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)
|
Decrease in accounts payable
|
|
(18,446
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)
|
(15,238
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)
|
Decrease in accrued expenses
|
|
(9,442
|
)
|
(12,281
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)
|
Increase (decrease) in other long-term liabilities
|
|
683
|
|
(2,394
|
)
|
Net cash provided by (used in) continuing
operations
|
|
18,295
|
|
(4,273
|
)
|
Net cash used in discontinued operations
|
|
(318
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)
|
(58
|
)
|
Net Cash Provided by (Used in) Operating
Activities
|
|
17,977
|
|
(4,331
|
)
|
|
|
|
|
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
Cash paid for property and equipment
|
|
(5,718
|
)
|
(6,942
|
)
|
Proceeds from dispositions of assets
|
|
10
|
|
132,090
|
|
Net cash (used in) provided by continuing
operations
|
|
(5,708
|
)
|
125,148
|
|
Net cash provided by discontinued operations
|
|
1,758
|
|
|
|
Net Cash (Used in) Provided by Investing
Activities
|
|
(3,950
|
)
|
125,148
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
Borrowings under line of credit agreements
|
|
160,498
|
|
97,909
|
|
Payments under line of credit agreements
|
|
(158,522
|
)
|
(139,332
|
)
|
Borrowings on trade payable program liability
|
|
33,871
|
|
27,222
|
|
Payments on trade payable program liability
|
|
(37,337
|
)
|
(22,456
|
)
|
Payment for finance issuance cost
|
|
|
|
(93
|
)
|
Proceeds from lease financing
|
|
|
|
4,676
|
|
Long-term debt and capital lease obligations
payments
|
|
(11,110
|
)
|
(18,905
|
)
|
Dividends paid
|
|
(1,575
|
)
|
(3,495
|
)
|
Other
|
|
129
|
|
8
|
|
Net Cash Used in Financing Activities
|
|
(14,046
|
)
|
(54,466
|
)
|
Net (Decrease) Increase in Cash and Cash
Equivalents
|
|
(19
|
)
|
66,351
|
|
Cash and Cash Equivalents at Beginning of Period
|
|
21,332
|
|
20,926
|
|
Cash and Cash Equivalents at End of Period
|
|
$
|
21,313
|
|
$
|
87,277
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information:
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
831
|
|
$
|
|
|
Cash paid for interest, net of amounts capitalized
|
|
$
|
3,830
|
|
$
|
3,994
|
|
Accrued purchases of property and equipment
|
|
$
|
599
|
|
$
|
3,689
|
|
See notes to condensed consolidated financial
statements.
4
Table of
Contents
THE
PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Dollar
Amounts in Thousands)
NOTE
1. Condensed Consolidated Financial Statements
The
condensed consolidated balance sheet as of May 2, 2009, the condensed
consolidated statements of operations and changes in retained earnings for the
thirteen week periods ended May 2, 2009 and May 3, 2008 and the
condensed consolidated statements of cash flows for the thirteen week periods
ended May 2, 2009 and May 3, 2008 are unaudited. In the opinion of
management, all adjustments necessary to present fairly the financial position,
results of operations and cash flows at May 2, 2009 and for all periods
presented have been made.
Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America have been condensed or omitted, as permitted by Rule 10-01
of the Securities and Exchange Commissions Regulation S-X, Interim Financial
Statements. It is suggested that these condensed consolidated financial
statements be read in conjunction with the financial statements and notes
thereto included in the Companys Annual Report on Form 10-K for the
fiscal year ended January 31, 2009. The results of operations for the
thirteen weeks ended May 2, 2009 are not necessarily indicative of the
operating results for the full fiscal year.
Our fiscal year ends on the Saturday nearest January 31.
Accordingly, references to fiscal years 2008 and 2009 refer to the years ended January 31,
2009 and January 30, 2010, respectively.
NOTE
2. New Accounting Standards
Effective
February 1, 2009, the Company adopted Statement of Financial Accounting
Standards (SFAS) No.161, Disclosures about Derivative Instruments and Hedging
Activitiesan amendment of FASB Statement No.133 (SFAS No.161). SFAS No.161
requires increased qualitative, quantitative, and credit-risk disclosures.
Qualitative disclosures include how and why an entity uses derivatives or
hedging activity, how the entity is accounting for these activities and how the
instruments affect the entitys financial position, financial performance and
cash flows. Quantitative disclosures include information (in a tabular format)
about the fair value of the derivative instruments, including gains and losses,
and should contain more detailed information about the location of the derivative
instrument in the entitys financial statements. Credit-risk disclosures
include information about the existence and nature of credit risk-related
contingent features included in derivative instruments. Credit-risk-related
contingent features can be defined as those that require entities, upon the
occurrence of a credit event (e.g., credit rating downgrade), to settle
derivative instruments or to post collateral. See note 16 for additional
information related to our derivatives.
In
April 2009, the Financial Accounting Standards Board (FASB) jointly issued
FASB Staff Position No.107-1, Interim Disclosures about Fair Value of
Financial Instruments (FSP No.107-1) and Accounting Practices Bulletin Opinion
No.28-1 (APB No.28-1). FSP No.107-1 and APB No.28-1 amend SFAS No.107 Disclosures
about Fair Value of Financial Instruments, to require disclosures about fair
value of financial instruments for interim reporting periods of publicly traded
companies as well as in annual financial statements. FSP No.107-1 and APB
No.28-1 are effective for interim reporting periods ending after June 15,
2009. The Company is currently evaluating the impact FSP No.107-1 and APB
No.28-1will have on its consolidated financial statements.
NOTE 3. Accounting for Stock-Based Compensation
The Company has stock-based compensation plans,
under which it grants stock options and restricted stock units to key employees
and members of its Board of Directors.
In accordance with FASB Statement No.123(R), Share-Based
Payment (SFAS No.123(R)), the Company generally recognizes compensation
expense on a straight-line basis over the vesting period. A summary of total
compensation expense and associated income benefit recognized related to
stock-based compensation follows:
|
|
Thirteen Weeks Ended
|
|
(dollar amount in thousands)
|
|
May 2, 2009
|
|
May 3, 2008
|
|
Compensation expense
|
|
$
|
568
|
|
$
|
1,322
|
|
Income tax benefit
|
|
$
|
211
|
|
$
|
491
|
|
5
Table of Contents
Stock Options
The following table summarizes the options under
the Companys plan:
|
|
Number of Shares
|
|
Outstanding January 31, 2009
|
|
915,711
|
|
Granted
|
|
736,000
|
|
Expired
|
|
(59,350
|
)
|
Outstanding May 2, 2009
|
|
1,592,361
|
|
Expected volatility is
based on historical volatilities for a time period similar to that of the
expected term. In estimating the expected term of the options, the Company has
utilized the actual experience method during the quarters ended May 2,
2009, and May 3, 2008, respectively. 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 the grant using the Black-Scholes option-pricing model and, in certain
situations where the grant includes both a market and a service condition as
described more fully below, the Monte Carlo simulation model is used. The
following are the weighted-average assumptions:
|
|
May 2, 2009
|
|
May 3, 2008
|
|
Dividend yield
|
|
1.76
|
%
|
2.90
|
%
|
Expected volatility
|
|
65.10
|
%
|
45.43
|
%
|
Risk-free interest rate range:
|
|
|
|
|
|
High
|
|
2.30
|
%
|
2.86
|
%
|
Low
|
|
2.30
|
%
|
2.69
|
%
|
Ranges of expected lives in years
|
|
4 - 5
|
|
4 - 5
|
|
In the first quarter of fiscal year 2009, the
Company granted 736,000 stock options with a weighted average grant date fair
value of $1.69. These options have a seven year term and include both a service
and a market appreciation vesting requirement. These options vest over a three
year period with a third vesting on each of the three grant date anniversaries
provided the market price of the Companys stock has appreciated by a certain
amount. From the date of grant, the market price of the Companys stock must
have appreciated, for at least 15 consecutive trading days, by $2.00 above
grant price or more for 536,000 options and by $6.88 above grant price or more
for 200,000 options in order to vest. The Company used a Monte Carlo simulation
model to estimate the expected term and is recording the compensation expense
over the service period for each separately vesting portion of the options
granted. At May 2, 2009, the $2.00 market appreciation vesting requirement
was satisfied.
Restricted Stock Units
The
Company did not grant any restricted stock units (RSUs) during the first
quarter ended May 2, 2009. In the prior year first fiscal quarter, the
Company issued 237,021 RSUs with a weighted average grant fair value of $11.50.
NOTE
4. 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 managements 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 $485,513 and $493,886 as of May 2, 2009 and January 31,
2009, respectively.
The
Company provides estimates for inventory shrinkage based upon historical levels
and the results of its cycle counting program.
The
Company also provides for potentially excess and obsolete inventories based on
current inventory levels, the historical analysis of product sales and current
market conditions. The nature of the Companys inventory is such that the risk
of obsolescence is minimal and excess inventory has historically been returned
to the Companys vendors for credit. The Company records a provision when less
than full credit is expected from a vendor or when market is lower than
recorded costs. These provisions are revised, if necessary, on a quarterly
basis for adequacy. The Companys inventory is recorded net of provisions for
these matters which were $16,755 and $15,874 at May 2, 2009 and January 31,
2009, respectively.
NOTE
5. Property and Equipment
The
Companys property and equipment as of May 2, 2009 and January 31,
2009 was as follows:
6
Table of Contents
(dollar amounts in thousands)
|
|
May 2,
2009
|
|
January 31,
2009
|
|
|
|
|
|
|
|
Property
and Equipment - at cost:
|
|
|
|
|
|
Land
|
|
$
|
205,749
|
|
$
|
207,608
|
|
Buildings
and improvements
|
|
823,392
|
|
822,950
|
|
Furniture,
fixtures and equipment
|
|
686,626
|
|
685,707
|
|
Construction
in progress
|
|
2,858
|
|
2,576
|
|
Accumulated
depreciation and amortization
|
|
(993,927
|
)
|
(978,510
|
)
|
Property
and Equipment - net
|
|
$
|
724,698
|
|
$
|
740,331
|
|
NOTE
6. Income Taxes
The
Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No.109, Accounting for Income Taxes (SFAS No.109) and
Financial Accounting Standard Board Interpretation No. 48, Accounting for
Uncertainty in Income Taxes (FIN 48).
Under
SFAS No.109, 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 sheets. The Company must assess the
likelihood that any recorded deferred tax assets will be recovered against
future taxable income. To the extent the Company believes it is more likely
than not that the asset will not be recoverable, a valuation allowance must be established.
Cumulative losses in recent years constitute negative evidence that a
recovery is not more likely than not, which must be rebutted by positive
evidence to avoid establishing a valuation allowance. To establish this positive
evidence, the Company considers various tax planning strategies for generating
income sufficient to utilize the deferred tax assets, including the potential
sale of real estate and the conversion of the Companys accounting policy for
its inventory from LIFO to FIFO. After considering all this evidence, the
Company did not have any material change to its valuation allowance for the
thirteen weeks ended May 2, 2009.
FIN
48 prescribes a recognition threshold and a measurement attribute for the financial
statement recognition and measurement of tax positions taken or expected to be
taken in a tax return. For those benefits 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 thirteen weeks ended May 2, 2009, the Company recognized no
material adjustment in the liability for unrecognized income tax benefits.
7
Table of
Contents
NOTE
7. Discontinued Operations
In
accordance with FASB Statement No.144, Accounting for the Impairment or
Disposal of Long-Lived Assets (SFAS No.144), the Companys discontinued
operations reflect the operating results for 11 of the 31 low-return stores
closed as part of the Companys long term strategic plan adopted in 2007. The
remaining stores are reflected in continuing operations, as the Company
believes its remaining stores will retain the cash flows from the 20 closed
locations. For the thirteen weeks ended May 2, 2009 and May 3, 2008
the discontinued stores had pre-tax losses of $237 and $988, respectively.
A store location is classified as held for sale
when (i) the Company has committed to a plan to sell the store location, (ii) the
store location is vacant and is available for sale, (iii) the Company is
actively marketing the store location 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 from the date the store location
is first classified as held for sale. No depreciation expense is recognized
during the period the asset is held for sale.
The Company has classified certain closed store
properties as assets held for disposal on its balance sheets. The carrying
values of these assets follow:
(dollar amounts in thousands)
|
|
May 2,
2009
|
|
January 31,
2009
|
|
|
|
|
|
|
|
Land
|
|
$
|
5,914
|
|
$
|
7,332
|
|
Buildings
and improvements
|
|
9,628
|
|
11,265
|
|
Accumulated
depreciation and amortization
|
|
(4,538
|
)
|
(5,944
|
)
|
Assets
held for disposal
|
|
$
|
11,004
|
|
$
|
12,653
|
|
During
the first quarter of fiscal year 2009, the Company sold two properties that
were classified as held for sale for net proceeds of $1,758 and recognized a
$109 net gain which was reported in discontinued operations. The Company had 11
and 13 properties held for sale at May 2, 2009 and January 31, 2009,
respectively.
The following details the first quarter of
fiscal year 2009 activity, principally related to lease commitments, in the
reserve for closed stores:
(dollar amount in thousands)
|
|
Lease
Expenses
|
|
Balance
at January 31, 2009
|
|
$
|
2,112
|
|
Provision
for present value of liabilities
|
|
121
|
|
Other
|
|
224
|
|
Cash
payments
|
|
(312
|
)
|
Balance
at May 2, 2009
|
|
$
|
2,145
|
|
8
Table of
Contents
NOTE
8. Pension and Savings Plan
Pension
expense includes the following:
|
|
Thirteen weeks ended
|
|
(dollar amounts in thousands)
|
|
May 2, 2009
|
|
May 3, 2008
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
|
|
$
|
43
|
|
Interest cost
|
|
621
|
|
885
|
|
Expected return on plan assets
|
|
(537
|
)
|
(615
|
)
|
Amortization of transitional obligation
|
|
|
|
41
|
|
Amortization of prior service cost
|
|
|
|
92
|
|
Amortization of net loss
|
|
325
|
|
303
|
|
Net periodic benefit cost
|
|
$
|
409
|
|
$
|
749
|
|
On
December 31, 2008, the Company terminated the defined benefit portion of
the SERP. Since that date, the Company now only has a non-qualified
Supplemental Executive Retirement Plan (SERP) defined contribution plan for key
employees designated by the Board of Directors. The Companys contribution
expense to this plan was approximately $263 and $105 for the thirteen weeks
ended May 2, 2009 and May 3, 2008, respectively.
The
Company has two qualified savings plans, which cover all full-time employees
who are at least 21 years of age with one or more years of service. Generally,
the Company contributes the lesser of 50% of the first 6% of a participants
contributions or 3% of the participants compensation. In the first quarter of
2009, the Companys contribution to this plan became contingent upon meeting
certain fiscal year 2009 performance metrics. The Companys savings plans
contribution expense was approximately $1,078 and $1,052 for the thirteen weeks
ended May 2, 2009 and May 3, 2008, respectively.
NOTE 9.
Sale-Leaseback Transactions
During
the first quarter of fiscal year 2008, the Company sold 41 owned properties to
independent third parties. Net proceeds from these sales were $135,519.
Concurrent with the sale, the Company entered into agreements to lease the
properties back from the purchaser over a minimum lease term of 15 years. The
Company classified 40 of these leases as operating leases in accordance with
SFAS No.13 as amended by FASB Statement No.98. The Company actively uses these
properties and considers the leases as normal leasebacks. A $5,531 gain on the
sale of these properties was recognized immediately upon execution of the sale
and a $61,292 gain was deferred. The deferred gain is being recognized over the
minimum term of these leases. The Company initially had continuing involvement
in one property relating to an environmental indemnity and, accordingly,
recorded $4,583 of the transactions total net proceeds as a borrowing and as a
financing activity in the Statement of Cash Flows. During the second quarter of
fiscal year 2008, the Company provided the necessary documentation to satisfy
its indemnity and remove its continuing involvement with this property. The
Company then recorded the sale of this property as a sale-leaseback
transaction, removing the asset and related lease financing and recorded a
$1,515 deferred gain which is being recognized over the remaining minimum term
of this lease.
Of the 563 store locations operated by the
Company at May 2, 2009, 235 are owned and 328 are leased.
NOTE
10. Debt and Financing Arrangements
(dollar amounts in thousands)
|
|
May 2, 2009
|
|
January 31, 2009
|
|
7.50% Senior Subordinated Notes, due
December 2014
|
|
$
|
157,565
|
|
$
|
174,535
|
|
Senior Secured Term Loan, due October 2013
|
|
150,524
|
|
150,794
|
|
Lease financing obligations, payable through
October 2022
|
|
|
|
4,515
|
|
Capital lease obligations payable through
October 2009
|
|
71
|
|
129
|
|
Line of credit agreement, expiring
January 2014
|
|
25,838
|
|
23,862
|
|
|
|
333,998
|
|
353,835
|
|
Less current maturities
|
|
1,150
|
|
1,453
|
|
Long-term debt and obligations under capital
leases, less current maturities
|
|
$
|
332,848
|
|
$
|
352,382
|
|
On
January 16, 2009, the Company entered into a new revolving credit
agreement with available borrowings up to $300,000. 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 credit line is
LIBOR or Prime plus 2.75% to 3.25% based upon the then current availability
under the facility.
9
Table
of Contents
During
the first quarter of fiscal 2009 and 2008 , the Company repurchased $16,970 and
$20,965, respectively of its outstanding 7.5% Senior Subordinated Notes for
$10,722 and $18,082, respectively resulting in a gain of $6,248 and $2,833,
respectively and are reflected in
interest expense on the accompanying Condensed Consolidated Statement of
Operations and Changes in Retained Earnings.
As
part of the November 27, 2007 sale leaseback transaction, the Company
determined that it had continuing involvement in one property and recorded the
$4,742 proceeds, net of execution costs, as a borrowing in accordance with
Statement of Financial Accounting Standards No.13, Accounting for Leases,
(SFAS No.13). During the first quarter of 2009, the Company determined it no
longer had continuing involvement with this property. Accordingly, the Company
recorded this property as a sale leaseback, retired the asset and related lease
financing and recorded an $829 deferred gain which is being amortized over the
remaining minimum term of the lease.
Several
of the Companys debt agreements require compliance with covenants. The most
restrictive of these requirements is contained in the Companys revolving
credit agreement. During any period that the Companys availability under its
revolving credit agreement drops below $52,500 the Company is required to
maintain a consolidated fixed charge coverage ratio, of at least 1.1:1.0,
calculated as the ratio of (a) EBITDA (net income plus interest charges,
provision for taxes, depreciation and amortization expense, non-cash stock
compensation expenses and other non-recurring, non-cash items) minus capital
expenditures and income taxes paid to (b) the
sum of debt service charges and restricted payments made. The failure to
satisfy this covenant would constitute an event of default under the Companys
revolving credit agreement, which would result in a cross-default under the
Companys 7.5% Senior Subordinated Notes and Senior Secured Term Loan.
As
of May 2, 2009, the Company had additional availability under the
revolving credit agreement of approximately $171,704 and was in compliance with
its financial covenants.
NOTE
11. 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 vendors stipulated allowance.
Service labor warranties are covered in full by the Company on a limited
lifetime basis. The Company establishes its warranty reserves based on
historical data of warranty transactions.
The
reserve for warranty costs activity follows:
|
|
Thirteen Weeks Ended
|
|
(dollar amounts in thousands)
|
|
May 2, 2009
|
|
May 3, 2008
|
|
Beginning Balance
|
|
$
|
797
|
|
$
|
247
|
|
|
|
|
|
|
|
Additions related to current period sales
|
|
4,104
|
|
2,230
|
|
|
|
|
|
|
|
Warranty costs incurred in current period
|
|
(4,207
|
)
|
(2,013
|
)
|
|
|
|
|
|
|
Ending Balance
|
|
$
|
694
|
|
$
|
464
|
|
10
Table
of Contents
NOTE
12. Earnings Per Share
(in
thousands, except per share amounts)
|
|
Thirteen Weeks Ended
|
|
(dollar amounts in thousands, except per share amounts)
|
|
May 2,
2009
|
|
May 3,
2008
|
|
|
|
|
|
|
|
|
(a)
|
Net
Earnings From Continuing Operations
|
|
$
|
11,063
|
|
$
|
5,291
|
|
|
|
|
|
|
|
|
|
Discontinued Operations, Net of Tax
|
|
(154
|
)
|
(619
|
)
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
10,909
|
|
$
|
4,672
|
|
|
|
|
|
|
|
|
(b)
|
Basic
average number of common shares outstanding during period
|
|
52,333
|
|
52,063
|
|
|
|
|
|
|
|
|
|
Common shares assumed issued upon exercise of
dilutive stock options, net of assumed repurchase, at the average market
price
|
|
43
|
|
107
|
|
|
|
|
|
|
|
|
(c)
|
Diluted
average number of common shares assumed outstanding during period
|
|
52,376
|
|
52,170
|
|
|
|
|
|
|
|
|
|
Basic Earnings per Share:
|
|
|
|
|
|
|
Net Earnings From Continuing Operations (a/b)
|
|
$
|
0.21
|
|
$
|
0.10
|
|
|
Discontinued Operations, Net of Tax
|
|
|
|
(0.01
|
)
|
|
Basic Earnings per Share
|
|
$
|
0.21
|
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
Diluted Earnings per Share:
|
|
|
|
|
|
|
Net Earnings From Continuing Operations (a/c)
|
|
$
|
0.21
|
|
$
|
0.10
|
|
|
Discontinued Operations, Net of Tax
|
|
|
|
(0.01
|
)
|
|
Diluted Earnings per Share
|
|
$
|
0.21
|
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of May 2, 2009 and May 3, 2008, respectively, there were 1,885,000
and 2,210,000 outstanding options and nonvested restricted stock units. Certain
stock options were excluded from the calculation of diluted earnings per share
because their exercise prices were greater than the average market price of the
common shares for the periods then ended and therefore would be anti-dilutive.
The total numbers of such shares excluded from the diluted earnings per share
calculation are 1,691,000 and 1,729,000 for the thirteen weeks ended May 2,
2009 and May 3, 2008, respectively.
NOTE
13. Supplemental Guarantor Information
The Companys 7.50%
Senior Subordinated Notes (the Notes) are fully and unconditionally and joint
and severally guaranteed by certain of the Companys direct and indirectly
wholly-owned subsidiaries - namely, The Pep Boys Manny Moe & Jack of
California, Pep Boys - Manny Moe & Jack of Delaware, Inc., Pep
Boys Manny Moe & Jack of Puerto Rico, Inc. and PBY Corporation,
(collectively, the Subsidiary Guarantors). The Notes are not guaranteed by the
Companys wholly owned subsidiary, Colchester Insurance Company.
The following condensed
consolidating information presents, in separate columns, the condensed
consolidating balance sheets as of May 3, 2009 and January 31, 2009
and the related condensed consolidating statements of operations for the
thirteen weeks ended May 2, 2009 and May 3, 2008 and condensed
consolidating statements of cash flows for the thirteen weeks ended May 2,
2009 and May 3, 2008 for (i) the Company (Pep Boys) on a parent only
basis, with its investment in subsidiaries recorded under the equity method, (ii) the
Subsidiary Guarantors on a combined basis including the consolidation by PBY
Corporation of its wholly owned subsidiary, Pep Boys Manny Moe & Jack
of California, (iii) the subsidiary of the Company that does not guarantee
the Notes, and (iv) the Company on a consolidated basis.
11
Table of
Contents
CONDENSED
CONSOLIDATING BALANCE SHEET
(dollars in
thousands)
As of May 2, 2009
|
|
Pep Boys
|
|
Subsidiary
Guarantors
|
|
Subsidiary Non-
Guarantors
|
|
Consolidation /
Elimination
|
|
Consolidated
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
10,929
|
|
$
|
7,450
|
|
$
|
2,934
|
|
$
|
|
|
$
|
21,313
|
|
Accounts receivable, net
|
|
10,297
|
|
12,383
|
|
|
|
|
|
22,680
|
|
Merchandise inventories
|
|
195,194
|
|
361,370
|
|
|
|
|
|
556,564
|
|
Prepaid expenses
|
|
9,871
|
|
12,879
|
|
10,136
|
|
(11,225
|
)
|
21,661
|
|
Other
|
|
759
|
|
7
|
|
63,622
|
|
(5,631
|
)
|
58,757
|
|
Assets held for disposal
|
|
1,830
|
|
9,174
|
|
|
|
|
|
11,004
|
|
Total Current Assets
|
|
228,880
|
|
403,263
|
|
76,692
|
|
(16,856
|
)
|
691,979
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and Equipment net
|
|
236,436
|
|
475,824
|
|
32,055
|
|
(19,617
|
)
|
724,698
|
|
Investment in subsidiaries
|
|
1,713,751
|
|
|
|
|
|
(1,713,751
|
)
|
|
|
Intercompany receivable
|
|
|
|
1,006,139
|
|
78,276
|
|
(1,084,415
|
)
|
|
|
Deferred income taxes
|
|
24,865
|
|
52,741
|
|
|
|
|
|
77,606
|
|
Other
|
|
16,611
|
|
866
|
|
|
|
|
|
17,477
|
|
Total Assets
|
|
$
|
2,220,543
|
|
$
|
1,938,833
|
|
$
|
187,023
|
|
$
|
(2,834,639
|
)
|
$
|
1,511,760
|
|
LIABILITIES AND STOCKHOLDERS
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
193,884
|
|
$
|
10
|
|
$
|
|
|
$
|
|
|
$
|
193,894
|
|
Trade payable program liability
|
|
28,464
|
|
|
|
|
|
|
|
28,464
|
|
Accrued expenses
|
|
41,561
|
|
51,066
|
|
163,362
|
|
(11,225
|
)
|
244,764
|
|
Deferred income taxes
|
|
16,684
|
|
27,487
|
|
|
|
(5,631
|
)
|
38,540
|
|
Current maturities of long-term debt and
obligations under capital leases
|
|
1,150
|
|
|
|
|
|
|
|
1,150
|
|
Total Current Liabilities
|
|
281,743
|
|
78,563
|
|
163,362
|
|
(16,856
|
)
|
506,812
|
|
Long-term debt and obligations under capital
leases, less current maturities
|
|
316,072
|
|
16,776
|
|
|
|
|
|
332,848
|
|
Other long-term liabilities
|
|
35,132
|
|
35,613
|
|
|
|
|
|
70,745
|
|
Deferred gain from asset sales
|
|
69,810
|
|
117,791
|
|
|
|
(19,617
|
)
|
167,984
|
|
Intercompany liabilities
|
|
1,084,415
|
|
|
|
|
|
(1,084,415
|
)
|
|
|
Stockholders Equity
|
|
433,371
|
|
1,690,090
|
|
23,661
|
|
(1,713,751
|
)
|
433,371
|
|
Total Liabilities and Stockholders Equity
|
|
$
|
2,220,543
|
|
$
|
1,938,833
|
|
$
|
187,023
|
|
$
|
(2,834,639
|
)
|
$
|
1,511,760
|
|
12
Table of
Contents
As of January 31, 2009
|
|
Pep Boys
|
|
Subsidiary
Guarantors
|
|
Subsidiary Non-
Guarantors
|
|
Consolidation/
Elimination
|
|
Consolidated
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
12,753
|
|
$
|
6,393
|
|
$
|
2,186
|
|
$
|
|
|
$
|
21,332
|
|
Accounts receivable, net
|
|
16,571
|
|
12,260
|
|
|
|
|
|
28,831
|
|
Merchandise inventories
|
|
199,304
|
|
365,627
|
|
|
|
|
|
564,931
|
|
Prepaid expenses
|
|
13,597
|
|
15,820
|
|
13,919
|
|
(17,946
|
)
|
25,390
|
|
Other
|
|
1,193
|
|
11
|
|
66,797
|
|
(5,580
|
)
|
62,421
|
|
Assets held for disposal
|
|
1,830
|
|
10,823
|
|
|
|
|
|
12,653
|
|
Total Current Assets
|
|
245,248
|
|
410,934
|
|
82,902
|
|
(23,526
|
)
|
715,558
|
|
Property and EquipmentNet
|
|
239,859
|
|
487,956
|
|
32,226
|
|
(19,710
|
)
|
740,331
|
|
Investment in subsidiaries
|
|
1,699,568
|
|
|
|
|
|
(1,699,568
|
)
|
|
|
Intercompany receivable
|
|
|
|
989,077
|
|
85,145
|
|
(1,074,222
|
)
|
|
|
Deferred income taxes
|
|
24,075
|
|
53,633
|
|
|
|
|
|
77,708
|
|
Other
|
|
17,614
|
|
1,178
|
|
|
|
|
|
18,792
|
|
Total Assets
|
|
$
|
2,226,364
|
|
$
|
1,942,778
|
|
$
|
200,273
|
|
$
|
(2,817,026
|
)
|
$
|
1,552,389
|
|
LIABILITIES AND STOCKHOLDERS
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
212,331
|
|
$
|
9
|
|
$
|
|
|
$
|
|
|
$
|
212,340
|
|
Trade payable program liability
|
|
31,930
|
|
|
|
|
|
|
|
31,930
|
|
Accrued expenses
|
|
28,802
|
|
67,748
|
|
175,985
|
|
(17,781
|
)
|
254,754
|
|
Deferred income taxes
|
|
16,355
|
|
25,238
|
|
|
|
(5,745
|
)
|
35,848
|
|
Current maturities of long-term debt and
obligations under capital leases
|
|
1,208
|
|
245
|
|
|
|
|
|
1,453
|
|
Total Current Liabilities
|
|
290,626
|
|
93,240
|
|
175,985
|
|
(23,526
|
)
|
536,325
|
|
Long-term debt and obligations under capital
leases, less current maturities
|
|
332,682
|
|
19,700
|
|
|
|
|
|
352,382
|
|
Other long-term liabilities
|
|
34,868
|
|
35,454
|
|
|
|
|
|
70,322
|
|
Deferred gain from asset sales
|
|
70,810
|
|
119,104
|
|
|
|
(19,710
|
)
|
170,204
|
|
Intercompany liabilities
|
|
1,074,222
|
|
|
|
|
|
(1,074,222
|
)
|
|
|
Stockholders Equity
|
|
423,156
|
|
1,675,280
|
|
24,288
|
|
(1,699,568
|
)
|
423,156
|
|
Total Liabilities and Stockholders Equity
|
|
$
|
2,226,364
|
|
$
|
1,942,778
|
|
$
|
200,273
|
|
$
|
(2,817,026
|
)
|
$
|
1,552,389
|
|
13
Table of
Contents
CONDENSED CONSOLIDATING
STATEMENT OF OPERATIONS
(dollars in thousands)
Thirteen Weeks Ended May 2, 2009
|
|
Pep
Boys
|
|
Subsidiary
Guarantors
|
|
Subsidiary
Non-
Guarantors
|
|
Consolidation
/
Elimination
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merchandise Sales
|
|
$
|
136,328
|
|
$
|
261,849
|
|
$
|
|
|
$
|
|
|
$
|
398,177
|
|
Service Revenue
|
|
34,813
|
|
63,498
|
|
|
|
|
|
98,311
|
|
Other Revenue
|
|
|
|
|
|
5,723
|
|
(5,723
|
)
|
|
|
Total Revenues
|
|
171,141
|
|
325,347
|
|
5,723
|
|
(5,723
|
)
|
496,488
|
|
Costs of Merchandise Sales
|
|
96,018
|
|
185,424
|
|
|
|
(407
|
)
|
281,035
|
|
Costs of Service Revenue
|
|
28,813
|
|
57,077
|
|
|
|
(38
|
)
|
85,852
|
|
Costs of Other Revenue
|
|
|
|
|
|
6,805
|
|
(6,805
|
)
|
|
|
Total Costs of Revenues
|
|
124,831
|
|
242,501
|
|
6,805
|
|
(7,250
|
)
|
366,887
|
|
Gross Profit from Merchandise Sales
|
|
40,310
|
|
76,425
|
|
|
|
407
|
|
117,142
|
|
Gross Profit from Service Revenue
|
|
6,000
|
|
6,421
|
|
|
|
38
|
|
12,459
|
|
Gross Gain from Other Revenue
|
|
|
|
|
|
(1,082
|
)
|
1,082
|
|
|
|
Total Gross Profit (Loss)
|
|
46,310
|
|
82,846
|
|
(1,082
|
)
|
1,527
|
|
129,601
|
|
Selling, General and Administrative Expenses
|
|
37,982
|
|
69,082
|
|
78
|
|
911
|
|
108,053
|
|
Net Gain from Disposition of Assets
|
|
1
|
|
2
|
|
|
|
|
|
3
|
|
Operating Profit (Loss)
|
|
8,329
|
|
13,766
|
|
(1,160
|
)
|
616
|
|
21,551
|
|
Non-Operating (Expense) Income
|
|
(4,011
|
)
|
21,271
|
|
619
|
|
(17,476
|
)
|
403
|
|
Interest Expense (Income)
|
|
11,384
|
|
7,934
|
|
(522
|
)
|
(16,860
|
)
|
1,936
|
|
(Loss) Earnings from Continuing Operations Before
Income Taxes
|
|
(7,066
|
)
|
27,103
|
|
(19
|
)
|
|
|
20,018
|
|
Income Tax (Benefit) Expense
|
|
(3,165
|
)
|
12,129
|
|
(9
|
)
|
|
|
8,955
|
|
Equity in Earnings of Subsidiaries
|
|
14,800
|
|
|
|
|
|
(14,800
|
)
|
|
|
Net Earnings (Loss) from Continuing Operations
|
|
10,899
|
|
14,974
|
|
(10
|
)
|
(14,800
|
)
|
11,063
|
|
Discontinued Operations, Net of Tax
|
|
10
|
|
(164
|
)
|
|
|
|
|
(154
|
)
|
Net Earnings (Loss)
|
|
$
|
10,909
|
|
$
|
14,810
|
|
$
|
(10
|
)
|
$
|
(14,800
|
)
|
$
|
10,909
|
|
Thirteen weeks
ended May 3, 2008
|
|
Pep Boys
|
|
Subsidiary
Guarantors
|
|
Subsidiary
Non-Guarantors
|
|
Consolidation /
Elimination
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merchandise Sales
|
|
$
|
138,613
|
|
$
|
264,721
|
|
$
|
|
|
$
|
|
|
$
|
403,334
|
|
Service Revenue
|
|
33,373
|
|
61,336
|
|
|
|
|
|
94,709
|
|
Other Revenue
|
|
|
|
|
|
5,667
|
|
(5,667
|
)
|
|
|
Total Revenues
|
|
171,986
|
|
326,057
|
|
5,667
|
|
(5,667
|
)
|
498,043
|
|
Costs of Merchandise Sales
|
|
98,334
|
|
187,997
|
|
|
|
(408
|
)
|
285,923
|
|
Costs of Service Revenue
|
|
28,614
|
|
55,578
|
|
|
|
(38
|
)
|
84,154
|
|
Costs of Other Revenue
|
|
|
|
|
|
5,806
|
|
(5,806
|
)
|
|
|
Total Costs of Revenues
|
|
126,948
|
|
243,575
|
|
5,806
|
|
(6,252
|
)
|
370,077
|
|
Gross Profit from Merchandise Sales
|
|
40,279
|
|
76,724
|
|
|
|
408
|
|
117,411
|
|
Gross Profit from Service Revenue
|
|
4,759
|
|
5,758
|
|
|
|
38
|
|
10,555
|
|
Gross Loss from Other Revenue
|
|
|
|
|
|
(139
|
)
|
139
|
|
|
|
Total Gross Profit (Loss)
|
|
45,038
|
|
82,482
|
|
(139
|
)
|
585
|
|
127,966
|
|
Selling, General and Administrative Expenses
|
|
42,453
|
|
76,504
|
|
90
|
|
(32
|
)
|
119,015
|
|
Net Gain from Dispositions of Assets
|
|
556
|
|
4,975
|
|
|
|
|
|
5,531
|
|
Operating Profit (Loss)
|
|
3,141
|
|
10,953
|
|
(229
|
)
|
617
|
|
14,482
|
|
Non-Operating (Expense) Income
|
|
(4,104
|
)
|
28,475
|
|
648
|
|
(24,689
|
)
|
330
|
|
Interest Expense (Income)
|
|
23,836
|
|
6,710
|
|
(1,047
|
)
|
(24,072
|
)
|
5,427
|
|
(Loss) Earnings from Continuing Operations Before
Income Taxes
|
|
(24,799
|
)
|
32,718
|
|
1,466
|
|
|
|
9,385
|
|
Income Tax (Benefit) Expense
|
|
(10,473
|
)
|
13,917
|
|
650
|
|
|
|
4,094
|
|
Equity in Earnings of Subsidiaries
|
|
19,131
|
|
|
|
|
|
(19,131
|
)
|
|
|
Net Earnings from Continuing Operations
|
|
4,805
|
|
18,801
|
|
816
|
|
(19,131
|
)
|
5,291
|
|
Discontinued Operations, Net of Tax
|
|
(133
|
)
|
(486
|
)
|
|
|
|
|
(619
|
)
|
Net Earnings
|
|
$
|
4,672
|
|
$
|
18,315
|
|
$
|
816
|
|
$
|
(19,131
|
)
|
$
|
4,672
|
|
14
Table of Contents
CONDENSED CONSOLIDATING
STATEMENT OF CASH FLOWS
(dollars in thousands)
Thirteen Weeks Ended May 2, 2009
|
|
Pep
Boys
|
|
Subsidiary
Guarantors
|
|
Subsidiary Non-
Guarantors
|
|
Consolidation
/
Elimination
|
|
Consolidated
|
|
Cash Flows from Operating
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
Net Earnings (Loss)
|
|
$
|
10,909
|
|
$
|
14,810
|
|
$
|
(10
|
)
|
$
|
(14,800
|
)
|
$
|
10,909
|
|
Adjustments to Reconcile Net Earnings to Net Cash
(Used In) Provided By Continuing Operations
|
|
(15,396
|
)
|
12,550
|
|
285
|
|
14,183
|
|
11,622
|
|
Changes in operating assets and liabilities
|
|
10,498
|
|
(8,955
|
)
|
(5,779
|
)
|
|
|
(4,236
|
)
|
Net cash provided by (used in) continuing operations
|
|
6,011
|
|
18,405
|
|
(5,504
|
)
|
(617
|
)
|
18,295
|
|
Net cash provided by (used in) discontinued
operations
|
|
10
|
|
(328
|
)
|
|
|
|
|
(318
|
)
|
Net Cash Provided by (Used in) Operating Activities
|
|
6,021
|
|
18,077
|
|
(5,504
|
)
|
(617
|
)
|
17,977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in continuing operations
|
|
(2,706
|
)
|
(3,002
|
)
|
|
|
|
|
(5,708
|
)
|
Net cash provided by discontinued operations
|
|
|
|
1,758
|
|
|
|
|
|
1,758
|
|
Net Cash Used in Investing Activities
|
|
(2,706
|
)
|
(1,244
|
)
|
|
|
|
|
(3,950
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash (Used in) Provided by Financing Activities
|
|
(5,139
|
)
|
(15,776
|
)
|
6,252
|
|
617
|
|
(14,046
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (Decrease) Increase in Cash
|
|
(1,824
|
)
|
1,057
|
|
748
|
|
|
|
(19
|
)
|
Cash and Cash Equivalents at Beginning of Period
|
|
12,753
|
|
6,393
|
|
2,186
|
|
|
|
21,332
|
|
Cash and Cash Equivalents at End of Period
|
|
$
|
10,929
|
|
$
|
7,450
|
|
$
|
2,934
|
|
$
|
|
|
$
|
21,313
|
|
Thirteen Weeks Ended May 3, 2008
|
|
Pep Boys
|
|
Subsidiary
Guarantors
|
|
Subsidiary
Non-
Guarantors
|
|
Consolidation /
Elimination
|
|
Consolidated
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
Net Earnings
|
|
$
|
4,672
|
|
$
|
18,315
|
|
$
|
816
|
|
$
|
(19,131
|
)
|
$
|
4,672
|
|
Adjustments to Reconcile Net Earnings to Net Cash
(Used in) Provided By Continuing Operations
|
|
(12,417
|
)
|
7,291
|
|
281
|
|
18,514
|
|
13,669
|
|
Changes in operating assets and liabilities
|
|
(16,535
|
)
|
(1,306
|
)
|
(4,773
|
)
|
|
|
(22,614
|
)
|
Net cash (used in) provided by continuing
operations
|
|
(24,280
|
)
|
24,300
|
|
(3,676
|
)
|
(617
|
)
|
(4,273
|
)
|
Net
cash (used in) provided by discontinued operations
|
|
(70
|
)
|
12
|
|
|
|
|
|
(58
|
)
|
Net
Cash (Used in) Provided by Operating Activities
|
|
(24,350
|
)
|
24,312
|
|
(3,676
|
)
|
(617
|
)
|
(4,331
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash Provided by Investing activities
|
|
39,255
|
|
85,893
|
|
|
|
|
|
125,148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Cash Provided by (Used in) Financing Activities
|
|
50,455
|
|
(109,449
|
)
|
3,911
|
|
617
|
|
(54,466
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Increase in Cash and Cash Equivalents
|
|
65,360
|
|
756
|
|
235
|
|
|
|
66,351
|
|
Cash
and Cash Equivalents at Beginning of Period
|
|
12,208
|
|
6,655
|
|
2,063
|
|
|
|
20,926
|
|
Cash
and Cash Equivalents at End of Period
|
|
$
|
77,568
|
|
$
|
7,411
|
|
$
|
2,298
|
|
$
|
|
|
$
|
87,277
|
|
15
Table of
Contents
NOTE
14. Commitments and Contingencies
In
September 2006, the United States Environmental Protection Agency (EPA)
requested certain information from the Company as part of an investigation to
determine whether the Company had violated, and is in violation of, the Clean
Air Act and its non-road engine regulations. The information requested
concerned certain generator and personal transportation merchandise offered for
sale by the Company. In the fourth quarter of fiscal year 2008, the EPA
informed the Company that it believed that the Company had violated the Clean
Air Act by virtue of the fact that certain of this merchandise did not conform
to their corresponding EPA Certificates of Conformity and that unless the EPA
and the Company were able to reach a settlement, the EPA was prepared to
commence a civil action. The Company is currently engaged in settlement
discussions with the EPA that would call for the payment of a civil penalty and
certain injunctive relief. As a result of these discussions, the Company has
accrued an amount equal to its estimate of the civil penalty that the Company
is prepared to pay to settle the matter and has temporarily restricted from
sale, and taken a partial asset impairment against certain inventory. If the
Company is not able to reach a settlement with the EPA on mutually acceptable
terms, the Company is prepared to vigorously defend any civil action filed.
The Company is also party to various other actions and
claims arising in the normal course of business.
The
Company believes that amounts accrued for awards or assessments in connection
with all such matters are adequate and that the ultimate resolution of these
matters will not have a material adverse effect on the Companys financial
position. However, there exists a reasonable possibility of loss in excess of
the amounts accrued, the amount of which cannot currently be estimated. While
the Company does not believe that the amount of such excess loss could be
material to the Companys financial position, any such loss could have a
material adverse effect on the Companys results of operations in the period(s) during
which the underlying matters are resolved.
NOTE
15. Other Comprehensive Income
The
following are the components of comprehensive income:
|
|
Thirteen weeks ended
|
|
(dollar amounts in thousands)
|
|
May 2, 2009
|
|
May 3, 2008
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
10,909
|
|
$
|
4,672
|
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
Defined benefit plan adjustment
|
|
204
|
|
274
|
|
Derivative financial instrument adjustments
|
|
48
|
|
1,423
|
|
Comprehensive income
|
|
$
|
11,161
|
|
$
|
6,369
|
|
The
components of accumulated other comprehensive loss are:
(dollar amounts in thousands)
|
|
May 2, 2009
|
|
January 31, 2009
|
|
|
|
|
|
|
|
Defined
benefit plan adjustment, net of tax
|
|
$
|
(7,549
|
)
|
$
|
(7,753
|
)
|
Derivative
financial instrument adjustment, net of tax
|
|
(10,274
|
)
|
(10,322
|
)
|
Accumulated other comprehensive loss
|
|
$
|
(17,823
|
)
|
$
|
(18,075
|
)
|
NOTE 16. Fair Value
Measurements
The Company adopted FASB Statement No.157, Fair Value
Measurement (SFAS No.157), (as impacted by FSP Nos.157-1, 157-2, 157-3, 157-4
and 157-e) effective February 3, 2008, with respect to fair value
measurements of (a) nonfinancial assets and liabilities that are
recognized or disclosed at fair value in the Companys financial statements on
a recurring basis (at least annually) and (b) all financial assets and
liabilities. The Company adopted FSP No.157-2, Effective Date of FASB
Statement No.157 (FSP No.157-2), during the thirteen weeks ended May 2,
2009. FSP No.157-2 which deferred the effective date of SFAS No.157 for
nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a
recurring basis (at least annually), to fiscal years and interim periods within
those fiscal years, beginning after November 15, 2008.
16
Table of Contents
Under SFAS No.157, 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. SFAS No.157 also establishes 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 Companys 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:
Effective February 3, 2008, the application of
fair value under SFAS No.157 (as amended by FSP Nos.157-1, 157-2, 157-3, 157-4
and 157-e) related to the Companys interest rate swap agreements. These items
were previously, and will continue to be, recorded at fair value at each
balance sheet date. The information in the following paragraphs and tables primarily
addresses matters relative to these financial 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 cost, which approximates fair value. As a result, the Company
has determined that our cash equivalents in their entirety are classified as a
Level 1 within the fair value hierarchy
.
Derivative liability:
The Company has an interest rate swap which is within
the scope of SFAS No.133, Accounting for Derivative Instruments and Hedging
Activities. The Company values this swap using observable market data to
discount projected cash flows and for credit risk adjustments.
The inputs used
to value our derivative 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, as defined by SFAS
No.157, on a recurring basis.
(dollar amounts in thousands)
|
|
Fair Value
at
|
|
Fair Value Measurements
Using Inputs Considered as
|
|
Description
|
|
May 2, 2009
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents
|
|
$
|
21,313
|
|
$
|
21,313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Other long-term liabilities
|
|
|
|
|
|
|
|
|
|
Derivative liability
|
|
$
|
15,867
|
|
|
|
$
|
15,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets and Liabilities that are
Measured at Fair Value on a Nonrecurring Basis:
The following table
provides information by level for assets and liabilities that are measured at
fair value, as defined by SFAS No.157, on a nonrecurring basis.
(dollar amounts in thousands)
|
|
Fair Value
at
|
|
Fair Value Measurements
Using Inputs Considered as
|
|
Description
|
|
May 2, 2009
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Assets held for disposal
|
|
$
|
11,004
|
|
|
|
$
|
11,004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of the end of the first quarter of fiscal 2009, the Company had one interest
rate swap designated as a cash flow hedge on $145,000 of the Companys $150,524
Senior Secured Term Loan facility which expires on October, 2013. The swap is
used to minimize interest rate exposure and overall interest costs by
converting the variable interest rate to a fixed rate of 5.036%. Since February 1,
2008, this
17
Table of
Contents
swap
was deemed to be fully effective and pursuant to SFAS No.133, all adjustments
in the interest rate swaps fair value have been recorded to Accumulated Other
Comprehensive Loss.
The
table below shows the effect of derivative instruments on the Statement of
Operations for the thirteen weeks ended May 2, 2009:
(dollar amounts in thousands)
|
|
Amount of
Gain/(Loss) in OCI
(Effective Portion)
|
|
Location of Gain/(Loss)
Reclassified from Accumulated
OCI into Income (Effective
Portion)
|
|
Amount of Gain/(Loss)
Reclassified from
Accumulated OCI into
Income (Effective Portion)
|
|
Cash Flow Hedge
|
|
|
|
|
|
|
|
Interest Rate swap
|
|
$
|
(37
|
)
|
Interest expense
|
|
$
|
(657
|
)
|
|
|
|
|
|
|
|
|
|
|
18
Table of Contents
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 January 31, 2009.
OVERVIEW
The
Pep Boys-Manny, Moe & Jack is a leader in the automotive aftermarket
with 563 stores located throughout 35 states and Puerto Rico. All stores
feature the nationally-recognized Pep Boys brand name, established through more
than 85 years of providing high-quality automotive merchandise and services.
The stores are all company-owned, ensuring chain-wide consistency for our customers.
We are the only national chain offering automotive service, tires, accessories
and parts under one roof, positioning us to achieve our goal of becoming the
automotive solutions provider of choice for the value-oriented customer. In
most of our stores we also have a commercial sales program that provides
commercial credit and prompt delivery of tires, parts and other products to
local, regional and national repair garages and dealers.
For
the thirteen weeks ended May 2, 2009, our comparable sales (sales
generated by locations in operation during the same period) decreased by 0.3%
compared to a decrease of 5.6% for the thirteen weeks ended May 3, 2008.
This decrease in comparable sales was comprised of a 1.3% decrease in
comparable merchandise sales offset by a 3.8% increase in comparable service
revenue. The difficult macro environment continues to negatively impact sales
in our discretionary product categories as consumers defer spending while sales
of non discretionary service and hard parts have improved from recent trends.
We believe that the steep decline in new car sales over the last year has and
will continue to generate additional service revenues and hard parts sales as
consumers will ultimately spend more maintaining and repairing their existing
aging vehicles. In part offsetting this trend is miles driven which has
declined for the twelfth straight month in February. Miles driven affect wear
items such as tires. However, the decline in miles driven has moderated in that
the recent monthly declines are at a lower rate than a year ago.
To
capitalize on these trends, we continue to focus on refining and expanding our
parts assortment to improve our in stock position, improving execution and the
customer experience and have developed new marketing promotions utilizing
television and radio advertising to communicate our value tire and service
offerings. In the first quarter of fiscal 2009, we ran the first two of these
promotions, which were successful in increasing customer traffic and sales in our
service business.
In
April 2009, we opened the first of our service-only spokes designed to
capture market share and leverage our existing supercenter and support
infrastructure. The prototypical service spoke is expected to have between 4
and 8 service bays, preferably 6. The capital investment for a prototypical
spoke, including inventory net of payables, is projected to be approximately
$450,000 to $550,000 and a typical spoke is expected to generate approximately
$1,000,000 to $1,500,000 in sales and $150,000 to $250,000 of EBITDA annually.
We currently plan to lease spoke locations as we believe that there are
sufficient existing available locations with attractive lease terms to enable
our expansion. We are targeting 15 new service spokes in fiscal 2009 and 20 to
40 in fiscal 2010 to prove the concept and economics.
Our
net earnings for the first quarter of 2009 were $10,909,000, a $6,237,000
improvement over the net earnings of $4,672,000 reported in the first quarter
of 2008. The increase in profitability resulted primarily from increased sales
in our service business, higher gross profit margins, expense control
initiatives that resulted in lower Selling, General and Administrative
expenses, and a reduction in interest expense. These reductions were partially
offset by lower gains from the sale of assets and an increase in income tax
expense. Our net earnings per share for the first quarter of 2009 were $0.21
per share, a $0.12 cent per share improvement over the $0.09 per share recorded
in the first quarter of 2008 (See Results of Operations).
The
following discussion explains the significant developments affecting our
financial condition and material changes in our results of operations for the
thirteen weeks ended May 2, 2009. We recommend that you read the audited
consolidated financial statements, 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 January 31,
2009.
LIQUIDITY
AND CAPITAL RESOURCES
Our
cash requirements arise principally from the purchase of inventory, capital
expenditures related to existing and new stores, offices and distribution
centers, debt service and contractual obligations. Cash flows realized through the
sale of automotive parts, accessories and services is our primary source of
liquidity. Net cash provided by operating activities was $17,977,000 in the
first quarter of 2009 as compared to a use of $4,331,000 in the first quarter
of 2008. The $22,308,000 improvement from the prior year was due to a
$4,190,000 increase in our net income (net of non-cash adjustments) and an
$18,378,000 favorable change in our operating assets and liabilities. The
change in operating assets and liabilities was primarily due to favorable
changes in inventory of $8,653,000, accounts
19
Table of Contents
receivable,
prepaid expenses and other of $7,017,000 and other long-term liabilities of
$3,077,000. The decline in inventory resulted from more disciplined inventory
management, including reduced seasonal inventory purchases, reduced lead times
and safety stocks. Accounts receivable,
prepaid expenses and other declined primarily due to the improved collection of
vendor support funds. The favorable change in other long-term liabilities was
due to increases in various lease and related liabilities in the current year
as opposed to a decline in the prior year.
Cash
used by investing activities was $3,950,000 in the first quarter of 2009 as
compared to net cash provided by investing activities of $125,148,000 in the
first quarter of 2008. During the first quarter of 2008, we completed sale
leaseback transactions for net proceeds of $135,519,000, of which $4,676,000
was shown in financing activities due to our continuing involvement in certain
of the sold properties. The proceeds from these transactions were used to
reduce debt obligations. During the first quarter of 2009, we sold the two
properties that were classified as held for sale for net proceeds of $1,758,000
and recognized a $109,000 net gain which was reported in discontinued
operations. Capital expenditures in the first quarter of the current year and
prior year were $5,718,000 and $6,942,000, respectively. Capital expenditures
for the first quarter of 2009 were for the maintenance of our existing stores,
offices and distribution centers, and for the new service only spoke location.
Our
fiscal year 2009 capital expenditures are expected to be approximately
$50,000,000 which includes the addition of approximately 15 service only spokes
and the general maintenance of our existing stores, offices and distribution
centers. These expenditures are expected to be funded by net cash generated
from operating activities and our existing line of credit.
In
the first quarter of fiscal year 2009 and 2008, we used cash in financing
activities of $14,046,000 and $54,466,000, respectively. During the first quarter
of 2009, we repurchased $16,970,000 of its outstanding 7.5% Senior Subordinated
Notes for $10,722,000. In the first quarter of 2008, we used the proceeds from
the sale leaseback transactions discussed above to reduce debt obligations,
including the amount then due under our revolving credit agreement of
$49,915,000 and to repurchase $20,965,000 principal amount of our 7.5% Senior
Secured Notes.
We
anticipate that cash provided by operating activities, our existing line of
credit and cash on hand will exceed our expected cash requirements in fiscal
year 2009. We expect to have excess availability under our existing line of
credit during the entirety of fiscal year 2009. We also have substantial owned
real estate which we believe we can monetize, if necessary, through additional
sale leaseback or other financing transactions. As of May 2, 2009, we had
undrawn availability under our revolving credit facility of $171,704,000.
Our
working capital was $185,167,000 and $179,233,000 at May 2, 2009 and January 31,
2009, respectively. Our long-term debt, as a percentage of our total
capitalization, was 43% and 45% at May 2, 2009 and January 31, 2009,
respectively.
As
of May 2, 2009, we had an outstanding balance of $28,464,000 (classified
as trade payable program liability on the consolidated balance sheet) under our
then current vendor financing program. Under this program, the factor makes
accelerated and discounted payments to our vendors and we, in turn, make our
regularly scheduled full vendor payments to the factor. We are currently
winding down this program in favor of a new trade payable program, entered into
on April 6, 2009, which will be funded by various bank participants who
will have the ability, but not the obligation, to purchase directly from our vendors
their account receivables owed by the Company. As of May 2, 2009, there
were no amounts outstanding under the new program.
DISCONTINUED
OPERATIONS
In
the third quarter of fiscal year 2007, we adopted our long-term strategic plan.
One of the initial steps in this plan was the identification of 31 low-return
stores for closure. We have accounted for these store closures in accordance
with the provisions of SFAS No.146 Accounting for Costs Associated with Exit
or Disposal Activities and SFAS No.144, Accounting for Impairment or Disposal
of Long-Lived Assets (SFAS No.144). In accordance with SFAS No.144, our
discontinued operations for all periods presented reflect the operating results
for 11 of the 31 closed stores because we do not believe that the customers of
these stores are likely to become customers of other Pep Boys stores due to
geographical considerations. The operating results for the other 20 closed
stores are included in continuing operations because we believe that the
customers of these stores are likely to become customers of other Pep Boys
stores that are in close proximity.
The
following analysis of our results of continuing operations excludes the
operating results of the above-referenced 11 stores which have been classified
as discontinued operations for all periods presented.
20
Table of Contents
RESULTS
OF OPERATIONS
Thirteen
Weeks Ended May 2, 2009 vs. Thirteen Weeks Ended May 3, 2008
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
|
|
May 2,
2009
(Fiscal 2009)
|
|
May 3,
2008
(Fiscal 2008)
|
|
Favorable
(Unfavorable)
|
|
|
|
|
|
|
|
|
|
Merchandise Sales
|
|
80.2
|
%
|
81.0
|
%
|
(1.3
|
)%
|
Service Revenue (1)
|
|
19.8
|
|
19.0
|
|
3.8
|
|
Total Revenue
|
|
100.0
|
|
100.0
|
|
(0.3
|
)
|
Costs of Merchandise Sales (2)
|
|
70.6
|
(3)
|
70.9
|
(3)
|
1.7
|
|
Costs of Service Revenue (2)
|
|
87.3
|
(3)
|
88.9
|
(3)
|
(2.0
|
)
|
Total Costs of Revenue
|
|
73.9
|
|
74.3
|
|
0.9
|
|
Gross Profit from Merchandise Sales
|
|
29.4
|
(3)
|
29.1
|
(3)
|
(0.2
|
)
|
Gross Profit from Service Revenue
|
|
12.7
|
(3)
|
11.1
|
(3)
|
18.0
|
|
Total Gross Profit
|
|
26.1
|
|
25.7
|
|
1.3
|
|
Selling, General and Administrative Expenses
|
|
21.8
|
|
23.9
|
|
9.2
|
|
Net Gain from Dispositions of Assets
|
|
|
|
1.1
|
|
(99.9
|
)
|
Operating Profit
|
|
4.3
|
|
2.9
|
|
48.8
|
|
Non-operating Income
|
|
0.1
|
|
0.1
|
|
22.1
|
|
Interest Expense
|
|
0.4
|
|
1.1
|
|
64.3
|
|
Earnings from Continuing Operations Before Income
Taxes
|
|
4.0
|
|
1.9
|
|
113.3
|
|
Income Tax Expense
|
|
44.7
|
(4)
|
43.6
|
(4)
|
(118.7
|
)
|
Net Earnings from Continuing Operations
|
|
2.2
|
|
1.1
|
|
109.1
|
|
Discontinued Operations, Net of Tax
|
|
|
|
(0.1
|
)
|
75.1
|
|
Net Earnings
|
|
2.2
|
|
0.9
|
|
133.5
|
|
(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 from Continuing Operations Before Income Taxes.
|
Total
revenue and comparable store revenue for the thirteen weeks ended May 2,
2009 decreased 0.3%, compared to the thirteen weeks ended May 3, 2008.
This decrease was primarily due to weaker sales in our retail business stemming
from lower customer counts and less discretionary spending by our customers.
Comparable revenues declined by 0.3%, consisting of a 1.3% decrease in
comparable merchandise sales which was mostly offset by an increase of 3.8% in
comparable service revenue.
In
the first quarter of 2009, customer traffic generated by two promotional events
resulted in an increase in service and commercial customer count. However,
total customer count declined in the first quarter of 2009 as a result of a
decrease in
Do-It-Yourself
(DIY) retail customer count. We believe the decrease in retail customer count
is a result of our competitors continuing to open new stores, the overall
industry decline in the DIY business and overall reduced spending due to the
current economic environment. In addition, we carry a large assortment of more
discretionary retail product which is more susceptible to consumer spending
deferrals. We continue to believe that providing a better customer experience,
value proposition and innovative marketing could stem the overall decline in
customer counts and sales over the long term.
21
Table
of Contents
Gross
profit as a percentage of merchandise sales increased from 29.1% for the first
quarter of 2008 to 29.4% for the first quarter of 2009. Gross profit dollars
remained relatively flat year over year. Product gross profit margins declined
by 90 basis points as result of increased product promotions and an overall
change in product mix, offset by lower occupancy and warehousing costs which
improved by 110 basis points.
Gross
profit from service revenue increased as a percentage of service revenue to
12.7 % in the first quarter of 2009 from 11.1% in the first quarter of 2008. In
dollars, gross profit from service sales in dollars increased 18.0% or
$1,904,000. The increase in gross profit was primarily due to the increase in
service revenue. The increase in sales volume resulted in higher absorption of
fixed expenses such as occupancy costs and to a certain extent, labor costs.
Selling,
General and Administrative expenses, as a percentage of total revenues
decreased from 23.9% in the first quarter of 2008 to 21.8% in the first quarter
of 2009. In dollars, selling, general and administrative expenses decreased
$10,962,000 or 9.2%. This decrease in dollars was primarily due to $3,758,000
in reduced payroll and related expenses, $5,466,000 of less media expense and $1,761,000
of lower legal and professional services fees.
Interest
expense decreased to $1,936,000 in the first quarter of 2009 from $5,427,000 in
the first quarter of 2008. Both years included gain from the retirement of debt
of $6,248,000 and $2,883,000, respectively. Excluding these gains, interest
expense remained relatively flat.
Our
income tax expense for first quarter of 2009 was $8,955,000 or an effective
rate of 44.7% as compared to an expense of $4,094,000 or an effective rate of
43.6% for the first quarter of 2008. The annual rate depends on a number of
factors, including the amount and source of operating profit and the timing and
nature of discrete items.
INDUSTRY
COMPARISON
We
operate in the U.S. automotive aftermarket, which has two general lines of
business: the Service Business defined as Do-It-For-Me (service labor,
installed merchandise and tires) market and the Retail Business defined as
Do-It-Yourself (retail merchandise) and commercial market. Generally,
specialized automotive retailers focus on either the Retail or Service areas of
the business. We believe that operation in both the Retail and Service areas of
the business positively differentiates us from most of our competitors.
Although we manage our store performance at a store level in aggregation, we
believe that the following presentation shows an accurate comparison against
competitors within the two sales arenas. We compete in the Retail area of the
business through our retail sales floor and commercial sales business. Our Service
Center business (labor and installed merchandise and tires) competes in the
Service area of the industry. The following table presents the revenues and
gross profit for each area of the business.
|
|
Thirteen weeks ended
|
|
(dollar amounts in thousands)
|
|
May 2, 2009
|
|
May 3, 2008
|
|
|
|
|
|
|
|
Retail Sales (1)
|
|
$
|
264,411
|
|
$
|
273,325
|
|
Service Center Revenue (2)
|
|
232,077
|
|
224,718
|
|
Total Revenues
|
|
$
|
496,488
|
|
$
|
498,043
|
|
|
|
|
|
|
|
Gross Profit from Retail Sales (3)
|
|
$
|
73,555
|
|
$
|
73,404
|
|
Gross Profit from Service Center Revenue (4)
|
|
56,046
|
|
54,562
|
|
Total Gross Profit
|
|
$
|
129,601
|
|
$
|
127,966
|
|
(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.
|
(4)
|
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
Effective
February 1, 2009, we adopted Statement of Financial Accounting Standards
(SFAS) No.161, Disclosures about Derivative Instruments and Hedging
Activitiesan amendment of FASB Statement No.133 (SFAS No.161). SFAS No.161
requires increased qualitative, quantitative, and credit-risk disclosures.
Qualitative disclosures include how and why an entity uses derivatives or
hedging
22
Table of
Contents
activity,
how the entity is accounting for these activities and how the instruments
affect the entitys financial position, financial performance and cash flows.
Quantitative disclosures include information (in a tabular format) about the
fair value of the derivative instruments, including gains and losses, and
should contain more detailed information about the location of the derivative
instrument in the entitys financial statements. Credit-risk disclosures
include information about the existence and nature of credit risk-related
contingent features included in derivative instruments. Credit-risk-related
contingent features can be defined as those that require entities, upon the
occurrence of a credit event (e.g., credit rating downgrade), to settle
derivative instruments or to post collateral. See note 16 for additional
information related to our derivatives.
In
April 2009, the Financial Accounting Standards Board (FASB) jointly issued
FASB Staff Position No.107-1, Interim Disclosures about Fair Value of
Financial Instruments (FSP No.107-1) and Accounting Practices Bulletin Opinion
No.28-1 (APB No.28-1). FSP No.107-1 and APB No.28-1 amend SFAS No.107 Disclosures
about Fair Value of Financial Instruments, to require disclosures about fair
value of financial instruments for interim reporting periods of publicly traded
companies as well as in annual financial statements. FSP No.107-1 and APB
No.28-1 are effective for interim reporting periods ending after June 15,
2009. We are currently evaluating the impact FSP No.107-1 and APB No.28-1will
have 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, we estimate our 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 January 31, 2009, 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 implementation of its
long-term strategic plan, future financial performance, automotive aftermarket
trends, levels of competition, business development activities, future capital
expenditures, financing sources and availability and the effects of regulation
and litigation. Although we believe that the expectations reflected in such
forward-looking statements are based on reasonable assumptions, we can give no
assurance that our expectations will be achieved. Our actual results may differ
materially from the results discussed in the forward-looking statements due to factors
beyond our control, including the strength of the national and regional
economies, retail and commercial consumers ability to spend, the health of the
various sectors of the automotive aftermarket, the weather in geographical
regions with a high concentration of our stores, competitive pricing, the
location and number of competitors stores, product and labor costs and the
additional factors described in our filings with the Securities and Exchange
Commission (SEC). We assume no obligation to update or supplement
forward-looking statements that become untrue because of subsequent events.
Item 3. Quantitative and Qualitative Disclosures About
Market Risk
Our
primary market risk exposure with regard to financial instruments is to changes
in interest rates. Pursuant to the terms of our revolving credit agreement,
changes in LIBOR or the Prime Rate could affect the rates at which we could
borrow funds thereunder. At May 2, 2009, we had borrowings of $25,838,000
under this facility. Additionally, we have a $150,524,000 Senior Secured Term
Loan facility that bears interest at three month LIBOR plus 2.0%.
We
have an interest rate swap for a notional amount of $145,000,000, which is
designated as a cash flow hedge on our Senior Secured Term Loan. We documented
that this swap met the requirements of SFAS No.133 for hedge accounting on April 9,
2007, and have since recorded the effective portion of the change in fair value
through Accumulated Other Comprehensive Loss.
23
Table of Contents
The
fair value of the interest rate swap was $15,867,000 and $15,808,000 payable at
May 2, 2009 and January 31, 2009, respectively. Of the net $59,000 increase
in fair value during the thirteen weeks ended May 2, 2009, $37,000 net of
tax was included in accumulated other comprehensive loss on the condensed
consolidated balance sheet.
24
Table of Contents
Item 4. Controls and
Procedures.
EVALUATION
OF DISCLOSURE CONTROLS AND PROCEDURES
Our
disclosure controls and procedures (as defined in Rule 13a-15 of the
Securities Exchange Act of 1934 (the Exchange Act)) are designed to ensure
that information required to be disclosed is accumulated and communicated to
our management, including our principal executive and principal financial
officers, as appropriate to allow timely decisions regarding required
disclosure. The term disclosure controls and procedures means controls and
other procedures of an issuer that are designed to ensure that information
required to be disclosed by the issuer in the reports that it files or submits
under the Act (15 U.S.C. 78a et seq.) is recorded, processed, summarized and
reported, within the time periods specified in the Commissions 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 Act is accumulated
and communicated to the issuers management, including its principal executive
and principal financial officers, or persons performing similar functions, as
appropriate to allow timely decisions regarding required disclosure. The
Companys management, with the participation of the Companys chief executive
officer and chief financial officer, evaluated the effectiveness of the Companys
disclosure controls and procedures as of the end of the period covered by this
report. Based on that evaluation, the chief executive officer and chief
financial officer concluded that our disclosure controls and procedures as of
the end of the period covered by this report were functioning effectively and
provide reasonable assurance that the information required to be disclosed by
the Company in reports filed under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SECs rules and
forms.
CHANGES
IN INTERNAL CONTROL OVER FINANCIAL REPORTING
No
change in the Companys internal control over financial reporting occurred
during the fiscal quarter covered by this report that has materially affected,
or is reasonably likely to materially affect, the Companys internal control
over financial reporting.
Item 5. Other
Information
None.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In
September 2006, the United States Environmental Protection Agency (EPA)
requested certain information from the Company as part of an investigation to
determine whether the Company had violated, and is in violation of, the Clean
Air Act and its non-road engine regulations. The information requested
concerned certain generator and personal transportation merchandise offered for
sale by the Company. In the fourth quarter of fiscal year 2008, the EPA
informed the Company that it believed that the Company had violated the Clean
Air Act by virtue of the fact that certain of this merchandise did not conform
to their corresponding EPA Certificates of Conformity and that unless the EPA
and the Company were able to reach a settlement, the EPA was prepared to
commence a civil action. The Company is currently engaged in settlement
discussions with the EPA that would call for the payment of a civil penalty and
certain injunctive relief. As a result of these discussions, the Company has
accrued an amount equal to its estimate of the civil penalty that the Company
is prepared to pay to settle the matter and has temporarily restricted from
sale, and taken a partial asset impairment against certain inventory. If the
Company is not able to reach a settlement with the EPA on mutually acceptable
terms, the Company is prepared to vigorously defend any civil action filed.
The Company is also party to various other actions and
claims arising in the normal course of business.
The
Company believes that amounts accrued for awards or assessments in connection
with all such matters are adequate and that the ultimate resolution of these
matters will not have a material adverse effect on the Companys financial
position. However, there exists a reasonable possibility of loss in excess of
the amounts accrued, the amount of which cannot currently be estimated. While
the Company does not believe that the amount of such excess loss could be
material to the Companys financial position, any such loss could have a
material adverse effect on the Companys results of operations in the period(s) during
which the underlying matters are resolved.
25
Table of Contents
Item 1A. Risk Factors
There
have been no changes to the risks described in the Companys previously filed
Annual Report on Form 10-K for the fiscal year ended January 31,
2009.
Item 2.
|
Unregistered Sales of Equity Securities and Use of Proceeds
|
|
|
|
None.
|
|
|
Item 3.
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Defaults Upon Senior Securities
|
|
|
|
None.
|
|
|
Item 4.
|
Submission of Matters to a Vote of Security Holders
|
|
|
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None.
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Item 5.
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Other Information
|
|
|
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None.
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Item 6.
Exhibits
(31.1)
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Certification of Chief
Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
|
|
(31.2)
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Certification of Chief
Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
|
|
(32.1)
|
Chief Executive Officer
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
(32.2)
|
Chief Financial Officer
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|
26
Table of
Contents
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
|
|
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THE PEP BOYS - MANNY,
MOE & JACK
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|
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(Registrant)
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|
|
|
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Date:
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June 10, 2009
|
|
by:
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/s/ Raymond L. Arthur
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|
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|
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|
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Raymond L. Arthur
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|
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Executive Vice President
and Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
|
27
Table of
Contents
INDEX TO EXHIBITS
(31.1)
|
Certification of Chief
Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
(31.2)
|
Certification of Chief
Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
|
|
(32.1)
|
Chief Executive Officer
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
(32.2)
|
Chief Financial Officer
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|
28
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