Table of Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

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**FORM 10-Q**

 

**(Mark One)**

 

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

 

**For the quarterly period ended July 31, 2010**

 

**OR**

 

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

 

**For thetransition period from            to          **

 

**CommissionFile No.  1-3381**

 

**The PepBoys - Manny, Moe & Jack**

(Exact name of registrant asspecified in its charter)

 

| **Pennsylvania**                            | ** ** | **23-0962915**              |
|---------------------------------------------|------------|-----------------------------|
| (State or other jurisdiction of             |       | (I.R.S. Employer ID number) |
| incorporation or organization)              |       |                        |
|                                        |       |                        |
| **3111 W. Allegheny Ave. Philadelphia, PA** | ** ** | **19132**                   |
| (Address of principal executive offices)    |       | (Zip code)                  |

 

**215-430-9000**

(Registrant’s telephonenumber, including area code)

 

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

 

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

 

Indicateby checkmark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seethe definitions of “large accelerated filer,” “accelerated filer” and “smallerreporting company” in Rule 12b-2 of the Exchange Act.

 

| Large  accelerated filer o |   | Accelerated  filer x         |
|----------------------------|--------|-----------------------------------|
|                       |   |                              |
| Non-accelerated filer o    |   | Smaller reporting  company o |

 

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

 

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

 

 

 

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Table ofContents

 

Index

 
| ** **                          | ** **                                                                                                                                                          | **Page** |
|-------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------|
| PART I - FINANCIAL INFORMATION |                                                                                                                                                                |
|                                |                                                                                                                                                                |     |
| Item 1.                             | Condensed  Consolidated Financial Statements (Unaudited)                                                                                                            |     |
|                                |                                                                                                                                                                |     |
|                                | Condensed Consolidated Balance Sheets - July 31,  2010 and January 30, 2010                                                                               | 3        |
|                                |                                                                                                                                                                |     |
|                                | Condensed Consolidated Statements of Operations and  Changes in Retained Earnings - Thirteen and Twenty-six Weeks Ended  July 31, 2010 and August 1, 2009 | 4        |
|                                |                                                                                                                                                                |     |
|                                | Condensed Consolidated Statements of Cash Flows -  Twenty-six Weeks Ended July 31, 2010 and August 1, 2009                                                | 5        |
|                                |                                                                                                                                                                |     |
|                                | Notes to the Condensed Consolidated Financial  Statements                                                                                                           | 6        |
|                                |                                                                                                                                                                |     |
| Item 2.                             | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                                         | 20       |
|                                |                                                                                                                                                                |     |
| Item 3.                             | Quantitative  and Qualitative Disclosures About Market Risk                                                                                                         | 26       |
|                                |                                                                                                                                                                |     |
| Item 4.                             | Controls and  Procedures                                                                                                                                            | 27       |
|                                |                                                                                                                                                                |     |
| Item 5.                             | Other Information                                                                                                                                                   | 27       |
|                                |                                                                                                                                                                |     |
| PART II  - OTHER INFORMATION   | 27                                                                                                                                                                  |
|                                |                                                                                                                                                                |     |
| Item 1.                             | Legal Proceedings                                                                                                                                                   | 27       |
|                                |                                                                                                                                                                |     |
| Item 1A.                            | Risk Factors                                                                                                                                                        | 28       |
|                                |                                                                                                                                                                |     |
| Item 2.                             | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                                                        | 28       |
|                                |                                                                                                                                                                |     |
| Item 3.                             | Defaults  Upon Senior Securities                                                                                                                                    | 28       |
|                                |                                                                                                                                                                |     |
| Item 4.                             | (Removed and  Reserved)                                                                                                                                             | 28       |
|                                |                                                                                                                                                                |     |
| Item 5.                             | Other Information                                                                                                                                                   | 28       |
|                                |                                                                                                                                                                |     |
| Item 6.                             | Exhibits                                                                                                                                                            | 29       |
|                                |                                                                                                                                                                |     |
| SIGNATURES                          | 30                                                                                                                                                                  |
|                                |                                                                                                                                                                |     |
| INDEX  TO EXHIBITS                  | 31                                                                                                                                                                  |

 

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PART I - FINANCIALINFORMATION

 

Item 1. Condensed ConsolidatedFinancial Statements (Unaudited)

 

THE PEP BOYS - MANNY,MOE & JACK AND SUBSIDIARIES

CONDENSEDCONSOLIDATED BALANCE SHEETS

(dollar amounts inthousands, except share data)

UNAUDITED

 
| ** **                                                                                     | ** ** | **July 31, 2010** | ** ** | **January 30, 2010** | ** ** |
|------------------------------------------------------------------------------------------------|------------|------------------------|------------|---------------------------|------------|
| **ASSETS**                                                                                     |       |                   |       |                      |       |
| Current assets:                                                                                |       |                   |       |                      |       |
| Cash and cash equivalents                                                                      |       | $                      | 92,363     |                      | $          | 39,326 |   |
| Accounts receivable, less allowance for  uncollectible accounts of $1,703 and $1,488           |       | 24,204                 |       | 22,983                    |       |
| Merchandise inventories                                                                        |       | 558,932                |       | 559,118                   |       |
| Prepaid expenses                                                                               |       | 20,816                 |       | 24,784                    |       |
| Other current assets                                                                           |       | 51,598                 |       | 65,428                    |       |
| Assets held for disposal                                                                       |       | 1,778                  |       | 4,438                     |       |
| Total current assets                                                                           |       | 749,691                |       | 716,077                   |       |
|                                                                                           |       |                   |       |                      |       |
| Property and equipment - net                                                                   |       | 694,262                |       | 706,450                   |       |
| Deferred income taxes                                                                          |       | 58,968                 |       | 58,171                    |       |
| Other long-term assets                                                                         |       | 17,364                 |       | 18,388                    |       |
| Total assets                                                                                   |       | $                      | 1,520,285  |                      | $          | 1,499,086 |   |
|                                                                                           |       |                   |       |                      |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                 |       |                   |       |                      |       |
| Current liabilities:                                                                           |       |                   |       |                      |       |
| Accounts payable                                                                               |       | $                      | 196,676    |                      | $          | 202,974 |   |
| Trade payable program liability                                                                |       | 55,280                 |       | 34,099                    |       |
| Accrued expenses                                                                               |       | 226,505                |       | 242,416                   |       |
| Deferred income taxes                                                                          |       | 35,750                 |       | 29,984                    |       |
| Current maturities of long-term debt                                                           |       | 1,079                  |       | 1,079                     |       |
| Total current liabilities                                                                      |       | 515,290                |       | 510,552                   |       |
|                                                                                           |       |                   |       |                      |       |
| Long-term debt less current maturities                                                         |       | 305,661                |       | 306,201                   |       |
| Other long-term liabilities                                                                    |       | 76,325                 |       | 73,933                    |       |
| Deferred gain from asset sales                                                                 |       | 159,177                |       | 165,105                   |       |
|                                                                                           |       |                   |       |                      |       |
| Stockholders’ equity:                                                                     |       |                   |       |                      |       |
| Common stock, par value $1 per share: authorized  500,000,000 shares; issued 68,557,041 shares |       | 68,557                 |       | 68,557                    |       |
| Additional paid-in capital                                                                     |       | 294,535                |       | 293,810                   |       |
| Retained earnings                                                                              |       | 393,245                |       | 374,836                   |       |
| Accumulated other comprehensive loss                                                           |       | (18,758                | )          | (17,691                   | )          |
| Less cost of shares in treasury — 16,072,557  shares and 16,164,074 shares                |       | 273,747                |       | 276,217                   |       |
| Total stockholders’ equity                                                                |       | 463,832                |       | 443,295                   |       |
| Total liabilities and stockholders’ equity                                                |       | $                      | 1,520,285  |                      | $          | 1,499,086 |   |

 

See notes to condensedconsolidated financial statements.

 

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THE PEP BOYS - MANNY,MOE & JACK AND SUBSIDIARIES

CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS

ANDCHANGES IN RETAINED EARNINGS

(dollar amounts inthousands, except per share amounts)

UNAUDITED

 
| ** **                                                                           | ** ** | **Thirteen weeks ended** | ** ** | **Twenty-six weeks ended** | ** ** |
|--------------------------------------------------------------------------------------|------------|------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                           | ** ** | **July 31,  2010**            | ** ** | **August 1,  2009**             | ** ** | **July 31,  2010** | ** ** | **August 1,  2009** | ** ** |
| Merchandise sales                                                                    |       | $                                  | 406,179    |                                 | $          | 392,071 |   | $ | 815,368 |   | $ | 790,248 |   |
| Service revenue                                                                      |       | 98,676                             |       | 96,840                               |       | 199,520 |   | 195,151 |   |
| Total revenues                                                                       |       | 504,855                            |       | 488,911                              |       | 1,014,888 |   | 985,399 |   |
| Costs of merchandise sales                                                           |       | 282,362                            |       | 275,790                              |       | 566,158 |   | 556,825 |   |
| Costs of service revenue                                                             |       | 87,992                             |       | 84,931                               |       | 176,634 |   | 170,783 |   |
| Total costs of revenues                                                              |       | 370,354                            |       | 360,721                              |       | 742,792 |   | 727,608 |   |
| Gross profit from merchandise sales                                                  |       | 123,817                            |       | 116,281                              |       | 249,210 |   | 233,423 |   |
| Gross profit from service revenue                                                    |       | 10,684                             |       | 11,909                               |       | 22,886 |   | 24,368 |   |
| Total gross profit                                                                   |       | 134,501                            |       | 128,190                              |       | 272,096 |   | 257,791 |   |
| Selling, general and administrative expenses                                         |       | 113,108                            |       | 109,482                              |       | 224,740 |   | 217,535 |   |
| Net gain (loss) from dispositions of assets                                          |       | 2,449                              |       | (16                                  | )          | 2,494 |   | (13 | ) |
| Operating profit                                                                     |       | 23,842                             |       | 18,692                               |       | 49,850 |   | 40,243 |   |
| Non-operating income                                                                 |       | 621                                |       | 539                                  |       | 1,205 |   | 942 |   |
| Interest expense                                                                     |       | 6,643                              |       | 6,466                                |       | 13,251 |   | 8,402 |   |
| Earnings from continuing operations before income  taxes and discontinued operations |       | 17,820                             |       | 12,765                               |       | 37,804 |   | 32,783 |   |
| Income tax expense                                                                   |       | 7,021                              |       | 4,907                                |       | 14,845 |   | 13,862 |   |
| Earnings from continuing operations before  discontinued operations                  |       | 10,799                             |       | 7,858                                |       | 22,959 |   | 18,921 |   |
| Loss from discontinued operations, net of tax                                        |       | (201                               | )          | (123                                 | )          | (411 | ) | (277 | ) |
| Net earnings                                                                         |       | 10,598                             |       | 7,735                                |       | 22,548 |   | 18,644 |   |
|                                                                                 |       |                               |       |                                 |       |   |   |   |   |
| Retained earnings, beginning of period                                               |       | 384,451                            |       | 367,882                              |       | 374,836 |   | 358,670 |   |
| Cash dividends                                                                       |       | (1,581                             | )          | (1,577                               | )          | (3,160 | ) | (3,152 | ) |
| Dividend reinvested and other                                                        |       | (223                               | )          | (77                                  | )          | (979 | ) | (199 | ) |
| Retained earnings, end of period                                                     |       | $                                  | 393,245    |                                 | $          | 373,963 |   | $ | 393,245 |   | $ | 373,963 |   |
|                                                                                 |       |                               |       |                                 |       |   |   |   |   |
| **Basic earnings per share:**                                                        |       |                               |       |                                 |       |   |   |   |   |
| Earnings from continuing operations before  discontinued operations                  |       | $                                  | 0.21       |                                 | $          | 0.15 |   | $ | 0.44 |   | $ | 0.36 |   |
| Loss from discontinued operations, net of tax                                        |       | (0.01                              | )          | —                               |       | (0.01 | ) | — |   |
| Basic earnings per share                                                             |       | $                                  | 0.20       |                                 | $          | 0.15 |   | $ | 0.43 |   | $ | 0.36 |   |
|                                                                                 |       |                               |       |                                 |       |   |   |   |   |
| **Diluted earnings per share:**                                                      |       |                               |       |                                 |       |   |   |   |   |
| Earnings from continuing operations before  discontinued operations                  |       | $                                  | 0.20       |                                 | $          | 0.15 |   | $ | 0.43 |   | $ | 0.36 |   |
| Loss from discontinued operations, net of tax                                        |       | —                             |       | —                               |       | — |   | — |   |
| Diluted earnings per share                                                           |       | $                                  | 0.20       |                                 | $          | 0.15 |   | $ | 0.43 |   | $ | 0.36 |   |
|                                                                                 |       |                               |       |                                 |       |   |   |   |   |
| Cash dividends per share                                                             |       | $                                  | 0.03       |                                 | $          | 0.03 |   | $ | 0.06 |   | $ | 0.06 |   |

 

Seenotes to condensed consolidated financial statements.

 

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THE PEP BOYS - MANNY,MOE & JACK AND SUBSIDIARIES

CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS

(dollar amounts inthousands)

UNAUDITED

 
| **Twenty-six weeks ended**                                                  | ** ** | **July 31, 2010** | ** ** | **August 1, 2009** | ** ** |
|---------------------------------------------------------------------------------------|------------|------------------------|------------|-------------------------|------------|
| ** **                                                                            | ** ** | ** **             | ** ** | ** **              | ** ** |
| **Cash flows from operating  activities:**                                            |       |                   |       |                    |       |
| Net earnings                                                                          |       | $                      | 22,548     |                    | $          | 18,644 |   |
| Adjustments to reconcile net earnings to net cash  provided by continuing operations: |       |                   |       |                    |       |
| Loss from discontinued operations, net of tax                                         |       | 411                    |       | 277                     |       |
| Depreciation and amortization                                                         |       | 36,656                 |       | 35,338                  |       |
| Amortization of deferred gain from asset sales                                        |       | (6,299                 | )          | (6,086                  | )          |
| Stock compensation expense                                                            |       | 1,998                  |       | 1,284                   |       |
| Gain on debt retirement                                                               |       | —                 |       | (6,248                  | )          |
| Deferred income taxes                                                                 |       | 5,600                  |       | 4,455                   |       |
| Gain from asset sales                                                                 |       | (2,494                 | )          | 13                      |       |
| Loss from asset impairment                                                            |       | 970                    |       | 47                      |       |
| Other                                                                                 |       | 179                    |       | 188                     |       |
| Changes in operating assets and liabilities:                                          |       |                   |       |                    |       |
| Decrease in accounts receivable, prepaid expenses  and other                          |       | 19,673                 |       | 24,143                  |       |
| Decrease in merchandise inventories                                                   |       | 186                    |       | 16,168                  |       |
| (Decrease) increase in accounts payable                                               |       | (6,298                 | )          | 10,634                  |       |
| Decrease in accrued expenses                                                          |       | (14,917                | )          | (18,658                 | )          |
| Increase in other long-term liabilities                                               |       | 911                    |       | 1,972                   |       |
| Net cash provided by continuing operations                                            |       | 59,124                 |       | 82,171                  |       |
| Net cash used in discontinued operations                                              |       | (1,249                 | )          | (543                    | )          |
| Net cash provided by operating activities                                             |       | 57,875                 |       | 81,628                  |       |
|                                                                                  |       |                   |       |                    |       |
| **Cash flows from investing  activities:**                                            |       |                   |       |                    |       |
| Cash paid for property and equipment                                                  |       | (27,284                | )          | (17,481                 | )          |
| Proceeds from dispositions of assets                                                  |       | 4,077                  |       | 1,098                   |       |
| Other                                                                                 |       | (144                   | )          | (500                    | )          |
| Net cash used in continuing operations                                                |       | (23,351                | )          | (16,883                 | )          |
| Net cash provided by discontinued operations                                          |       | 569                    |       | 1,758                   |       |
| Net cash used in investing activities                                                 |       | (22,782                | )          | (15,125                 | )          |
|                                                                                  |       |                   |       |                    |       |
| **Cash flows from financing  activities:**                                            |       |                   |       |                    |       |
| Borrowings under line of credit agreements                                            |       | 16,290                 |       | 222,017                 |       |
| Payments under line of credit agreements                                              |       | (16,290                | )          | (244,284                | )          |
| Borrowings on trade payable program liability                                         |       | 169,875                |       | 35,300                  |       |
| Payments on trade payable program liability                                           |       | (148,694               | )          | (64,616                 | )          |
| Debt payments                                                                         |       | (540                   | )          | (11,451                 | )          |
| Dividends paid                                                                        |       | (3,160                 | )          | (3,152                  | )          |
| Other                                                                                 |       | 463                    |       | 237                     |       |
| Net cash provided by (used in) financing  activities                                  |       | 17,944                 |       | (65,949                 | )          |
| Net increase in cash and cash equivalents                                             |       | 53,037                 |       | 554                     |       |
| Cash and cash equivalents at beginning of period                                      |       | 39,326                 |       | 21,332                  |       |
| Cash and cash equivalents at end of period                                            |       | $                      | 92,363     |                    | $          | 21,886 |   |
|                                                                                  |       |                   |       |                    |       |
| Supplemental disclosure of cash flow information:                                     |       |                   |       |                    |       |
| Cash paid for income taxes                                                            |       | $                      | 810        |                    | $          | 2,585 |   |
| Cash paid for interest                                                                |       | $                      | 11,452     |                    | $          | 12,366 |   |
| Accrued purchases of property and equipment                                           |       | $                      | 662        |                    | $          | 1,170 |   |

 

See notes to condensed consolidated financial statements

 

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THE PEP BOYS - MANNY,MOE & JACK AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS

(dollar amounts in thousands)

 

NOTE 1. Basis of Presentation

 

The Pep Boys — Manny, Moe &Jack and subsidiaries (the “Company”) consolidated financial statements havebeen prepared in accordance with accounting principles generally accepted inthe United States of America (“U.S. GAAP”). The preparation of the Company’sfinancial statements requires the Company to make estimates and assumptionsthat affect the reported amounts of assets, liabilities, net sales, costs andexpenses, as well as the disclosure of contingent assets and liabilities and otherrelated disclosures. The Company bases its estimates on historical experienceand on various other assumptions that management believes to be reasonableunder the circumstances, the results of which form the basis for makingjudgments about carrying values of the Company’s assets and liabilities thatare not readily apparent from other sources. Actual results could differ fromthose estimates, and the Company includes any revisions to its estimates in theresults for the period in which the actual amounts become known.

 

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

 

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

 

The Company’s fiscal year ends onthe Saturday nearest January 31. Accordingly, references to fiscal years2010 and 2009 refer to the years ended January 29, 2011 andJanuary 30, 2010, respectively.

 

NOTE 2. New Accounting Standards

 

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

 

In January 2010, the FASBissued ASU 2010-06 “Fair Value Measurements — Improving Disclosures on FairValue Measurements” (“ASU 2010-06”). This guidance requires new disclosuressurrounding transfers in and out of level 1 or 2 in the fair value hierarchyand also requires that in the reconciliation of level 3 inputs, the entityshould report separately information on purchases, sales, issuances orsettlements. The increased disclosures should be reported for each class ofassets or liabilities. ASU 2010-06 also clarifies existing disclosures for thelevel of disaggregating, disclosures about valuation techniques and inputs usedto determine level 2 or 3 fair value measurements and includes conformingamendments to the guidance on employers’ disclosures about postretirementbenefit plan assets. ASU 2010-06 was effective for interim and annual reportingperiods beginning after December 15, 2009 except for the disclosures aboutpurchases, sales, issuances or settlements in the roll forward activity forlevel 3 fair value measurements which are effective for interim and annualperiods beginning after December 15, 2010. The adoption of ASU 2010-06 forrequirements effective December 15, 2009 did not have a material impact onthe Company’s consolidated financial statements. The Company does not believethe adoption of those requirements of ASU 2010-06 which are effective forperiods beginning after December 15, 2010 will have a material impact onits consolidated financial statements.

 

NOTE 3. Merchandise Inventories

 

Merchandise inventories are valuedat 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 LIFOmethod can be made only at the end of each fiscal year based on inventory andcosts at that time. Accordingly, interim LIFO calculations must be based onmanagement’s estimates of expected fiscal year-end inventory levels and costs.If the first-in, first-out (“FIFO”) method of costing inventory had been usedby the Company, inventory would have 

 

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

 

The Company provides for estimatedinventory shrinkage based upon historical levels and the results of its cyclecounting program.

 

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

 

NOTE 4. Property and Equipment

 

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

 
| **(dollar amounts in thousands)** | ** ** | **July 31,  2010** | ** ** | **January 30,  2010** | ** ** |
|--------------------------------------------------|------------|-------------------------|------------|----------------------------|------------|
|                                             |       |                    |       |                       |       |
| Property  and equipment                          |       |                    |       |                       |       |
| Land                                             |       | $                       | 203,803    |                       | $          | 204,709 |   |
| Buildings  and improvements                      |       | 830,712                 |       | 826,804                    |       |
| Furniture,  fixtures and equipment               |       | 691,983                 |       | 695,072                    |       |
| Construction  in progress                        |       | 1,660                   |       | 1,550                      |       |
| Accumulated  depreciation and amortization       |       | (1,033,896              | )          | (1,021,685                 | )          |
| Property  and equipment — net               |       | $                       | 694,262    |                       | $          | 706,450 |   |

 

NOTE 5. Warranty Reserve

 

The Company provides warranties forboth its merchandise sales and service labor. Warranties for merchandise aregenerally covered by the respective vendors, with the Company covering anycosts above the vendor’s stipulated allowance. Service labor warranties arecovered in full by the Company on a limited lifetime basis. The Companyestablishes its warranty reserves based on historical data of warrantytransactions. These costs are included in either costs of merchandise sales orcosts of service revenues in the condensed consolidated statements ofoperations.

 

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

 
| **(dollar amounts in thousands)** | ** ** | **July 31,********2010** | ** ** | **January 30, 2010** | ** ** |
|--------------------------------------------------|------------|-------------------------------|------------|---------------------------|------------|
| Beginning balance                                |       | $                             | 694        |                      | $          | 797 |   |
|                                             |       |                          |       |                      |       |
| Additions related to current period sales        |       | 5,682                         |       | 15,572                    |       |
|                                             |       |                          |       |                      |       |
| Warranty costs incurred in current period        |       | (5,682                        | )          | (15,675                   | )          |
|                                             |       |                          |       |                      |       |
| Ending balance                                   |       | $                             | 694        |                      | $          | 694 |   |

 

NOTE 6. Debt and FinancingArrangements

 

The following are the components ofdebt and financing arrangements:

 
| **(dollar amounts in thousands)**         | ** ** | **July 31,  2010** | ** ** | **January 30,  2010** | ** ** |
|----------------------------------------------------------|------------|-------------------------|------------|----------------------------|------------|
| 7.50% Senior Subordinated Notes, due  December 2014 |       | $                       | 157,565    |                       | $          | 157,565 |   |
| Senior Secured Term Loan, due October 2013          |       | 149,175                 |       | 149,715                    |       |
| Revolving Credit Agreement, expiring  January 2014  |       | —                  |       | —                     |       |
|                                                     |       | 306,740                 |       | 307,280                    |       |
| Less current maturities                                  |       | 1,079                   |       | 1,079                      |       |
| Long-term debt, less current maturities                  |       | $                       | 305,661    |                       | $          | 306,201 |   |

 

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During the first quarter of fiscal2009, the Company repurchased $17.0 million of its outstanding 7.50% SeniorSubordinated Notes (the “Notes”) for $10.7 million resulting in a gain of $6.2million which is reflected in interest expense on the accompanying condensedconsolidated statements of operations and changes in retained earnings.

 

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

 

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

 

Several of the Company’s debtagreements require compliance with covenants. The most restrictive of theserequirements is contained in the Company’s Revolving Credit Agreement. Duringany period when the availability under the Revolving Credit Agreement dropsbelow the greater of $50.0 million or 17.5% of the borrowing base, the Companyis required to maintain a consolidated fixed charge coverage ratio of at least1.1:1.0, calculated as the ratio of (a) EBITDA (net income plus interestcharges, provision for taxes, depreciation and amortization expense, non-cashstock compensation expenses and other non-recurring, non-cash items) minuscapital expenditures and income taxes paid to (b) the sum of debt servicecharges and restricted payments made. The failure to satisfy this covenant wouldconstitute an event of default under the Revolving Credit Agreement, whichwould result in a cross-default under the Company’s 7.50% Senior SubordinatedNotes and Senior Secured Term Loan. As of July 31, 2010, the Company wasin compliance with all such financial covenants.

 

Interest rates that are currentlyavailable to the Company for issuance of debt with similar terms and remainingmaturities are used to estimate fair value for debt issues that are not quotedon an exchange. The estimated fair value of long-term debt including currentmaturities was $298.7 million and $290.8 million as of July 31, 2010 andJanuary 30, 2010, respectively.

 

NOTE 7.  Sale-Leaseback Transactions

 

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

 

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

 

NOTE 8. Income Taxes

 

TheCompany recognizes taxes payable for the current year, as well as deferred taxassets and liabilities for the future tax consequences of events that have beenrecognized in the Company’s financial statements or tax returns. The Companymust assess the likelihood that any recorded deferred tax assets will berecovered against future taxable income. To the extent the Company believes itis more likely than not that the asset will not be recoverable, a valuationallowance must be established. Cumulative losses in recent years constitute “negativeevidence” that a recovery is not more likely than not, which must be rebuttedby “positive evidence” to avoid establishing a valuation allowance. Toestablish this positive evidence, the Company considers various tax planningstrategies for generating income sufficient to utilize the deferred tax assets,including the potential sale of real estate and the conversion of the Company’saccounting policy for its inventory from LIFO to FIFO.

 

Forincome tax benefits related to uncertain tax positions to be recognized, a taxposition must be more likely than not to be sustained upon examination bytaxing authorities. The amount recognized is measured as the largest amount ofbenefit that is greater than 50 percent likely of being realized upon ultimatesettlement. During the twenty-six weeks ended July 31, 2010, the Companydid not have a material change to its uncertain tax position liabilities.

 

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NOTE 9. Accumulated OtherComprehensive Loss

 

The following are the components ofother comprehensive income:

 
| ** **                                       | ** ** | **Thirteen Weeks Ended** | ** **   | **Twenty-six Weeks Ended** | ** ** |
|--------------------------------------------------|------------|------------------------------------|--------------|--------------------------------------|------------|
| **(dollar amounts in thousands)** | ** ** | **July 31,  2010**                 | ** **   | **August 1,  2009**             | ** ** | **July 31,  2010** | ** ** | **August 1,  2009** | ** ** |
| Net earnings                                     |       | $                                  |  10,598 |                                 | $          |  7,735 |   | $ |  22,548 |   | $ |  18,644 |   |
| Other comprehensive income (loss), net of tax:   |       |                               |         |                                 |       |   |   |   |   |
| Defined benefit plan adjustment                  |       | 265                                |         | 356                                  |       | 530 |   | 560 |   |
| Derivative financial instrument adjustment       |       | (1,800                             | )       | 990                                  |       | (1,597 | ) | 1,038 |   |
|                                             |       |                               |         |                                 |       |   |   |   |   |
| Comprehensive income                             |       | $                                  |  9,063  |                                 | $          |  9,081 |   | $ |  21,481 |   | $ |  20,242 |   |

 

The components of accumulated othercomprehensive loss are:

 
| **(dollar amounts in thousands)**        | ** ** | **July 31, 2010** | ** **    | **January 30, 2010** | ** ** |
|---------------------------------------------------------|------------|------------------------|---------------|---------------------------|------------|
|                                                    |       |                   |          |                      |       |
| Defined benefit plan adjustment, net of tax             |       | $                      |  (6,628  | )                         | $          |  (7,158 | ) |
| Derivative financial instrument adjustment, net of  tax |       | (12,130                | )             | (10,533                   | )          |
| Accumulated other comprehensive loss                    |       | $                      |  (18,758 | )                         | $          |  (17,691 | ) |

 

NOTE 10: Impairments and Assets Held for Disposal

 

TheCompany evaluates the ability to recover long-lived assets whenever events orcircumstances indicate that the carrying value of the asset may not berecoverable. In the event assets are impaired, losses are recognized to theextent the carrying value exceeds fair value. In addition, the Company reportsassets held for disposal at the lower of the carrying amount or the estimatedfair market value, net of disposal costs. A store is classified as “held fordisposal” when (i) the Company has committed to a plan to sell,(ii) the building is vacant and the property is available for sale,(iii) the Company is actively marketing the property for sale,(iv) the sale price is reasonable in relation to its current fair valueand (v) the Company expects to complete the sale within one year. Nodepreciation expense is recognized during the period the asset is held fordisposal.

 

Duringthe second quarter of fiscal 2010, the Company recorded an $0.8 millionimpairment charge related to two stores classified as held and used. TheCompany used a probability-weighted approach and estimates of expected futurecash flows to determine the fair value of these stores. Discount and growthrate assumptions were derived from current economic conditions, management’sexpectations and projected trends of current operating results. The fair marketvalue estimate is classified as a Level 3 measure within the fair valuehierarchy. Of the $0.8 million impairment charge, $0.6 million was charged tomerchandise cost of sales, and $0.2 million was charged to service cost ofsales.

 

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

 

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

 

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| **(dollar amounts in thousands)** | ** ** | **July 31,  2010** | ** **  | **January 30,  2010** | ** ** |
|--------------------------------------------------|------------|--------------------|-------------|----------------------------|------------|
|                                             |       |               |        |                       |       |
| Land                                             |       | $                  |  1,310 |                       | $          |  2,980 |   |
| Buildings  and improvements                      |       | 2,445              |        | 5,453                      |       |
| Accumulated  depreciation and amortization       |       | (1,977             | )           | (3,995                     | )          |
| Property  and equipment - net                    |       | $                  |  1,778 |                       | $          |  4,438 |   |
| Number  of properties                            |       | 4                  |        | 8                          |       |

 

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

 

NOTE 11. Earnings Per Share

 

Thefollowing table presents the calculation of basic and diluted earnings pershare for earnings from continuing operations and net earnings:

 
| ** **                                                            | ** **                                                                                                                     | **Thirteen Weeks Ended** | ** ** | **Twenty-six Weeks Ended** | ** ** |
|-----------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------|------------------------------------|------------|--------------------------------------|------------|
| **(in thousands, except per share amounts)** | ** **                                                                                                                     | **July 31,  2010**            | ** ** | **August 1,  2009**             | ** ** | **July 31,  2010** | ** ** | **August 1,  2009** | ** ** |
| * *                                                              | * *                                                                                                                       | * *                           | * *   | * *                             | * *   | * * | * * | * * | * * |
| (a)                                                                   | Earnings from continuing operations                                                                                            |                               | $          |  10,799                         |       | $ |  7,858 |   | $ |  22,959 |   | $ |  18,921 |   |
|                                                                  |                                                                                                                           |                               |       |                                 |       |   |   |   |   |   |
|                                                                  | Loss from discontinued operations, net of tax                                                                                  |                               | (201       | )                                    | (123       | ) | (411 | ) | (277 | ) |
|                                                                  |                                                                                                                           |                               |       |                                 |       |   |   |   |   |   |
|                                                                  | Net earnings                                                                                                                   |                               | $          |  10,598                         |       | $ |  7,735 |   | $ |  22,548 |   | $ |  18,644 |   |
|                                                                  |                                                                                                                           |                               |       |                                 |       |   |   |   |   |   |
| (b)                                                                   | Basic average number of common shares outstanding  during period                                                               |                               | 52,682     |                                 | 52,384     |   | 52,609 |   | 52,359 |   |
|                                                                  |                                                                                                                           |                               |       |                                 |       |   |   |   |   |   |
|                                                                  | Common shares assumed issued upon exercise of  dilutive stock options, net of assumed repurchase, at the average market  price |                               | 447        |                                 | 315        |   | 426 |   | 179 |   |
|                                                                  |                                                                                                                           |                               |       |                                 |       |   |   |   |   |   |
| (c)                                                                   | Diluted average number of common shares assumed  outstanding during period                                                     |                               | 53,129     |                                 | 52,699     |   | 53,035 |   | 52,538 |   |
|                                                                  |                                                                                                                           |                               |       |                                 |       |   |   |   |   |   |
| ** **                                                            | **Basic earnings per share:**                                                                                                  | ** **                         | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                                  | Earnings from continuing operations (a/b)                                                                                      |                               | $          |  0.21                           |       | $ |  0.15 |   | $ |  0.44 |   | $ |  0.36 |   |
|                                                                  | Discontinued operations, net of tax                                                                                            |                               | (0.01      | )                                    | —     |   | (0.01 | ) | — |   |
|                                                                  | Basic earnings per share                                                                                                       |                               | $          |  0.20                           |       | $ |  0.15 |   | $ |  0.43 |   | $ |  0.36 |   |
| ** **                                                            | ** **                                                                                                                     | ** **                         | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                                  | **Diluted earnings per share:**                                                                                                |                               |       |                                 |       |   |   |   |   |   |
|                                                                  | Net earnings from continuing operations (a/c)                                                                                  |                               | $          |  0.20                           |       | $ |  0.15 |   | $ |  0.43 |   | $ |  0.36 |   |
|                                                                  | Discontinued operations, net of tax                                                                                            |                               | —     |                                 | —     |   | — |   | — |   |
|                                                                  | Diluted earnings per share                                                                                                     |                               | $          |  0.20                           |       | $ |  0.15 |   | $ |  0.43 |   | $ |  0.36 |   |

 

At July 31, 2010 and August 1,2009, respectively, there were 2,402,000 and 2,033,000 outstanding options andrestricted stock units. Certain stock options were excluded from thecalculation of diluted earnings per share because their exercise prices weregreater than the average market price of the common shares for the periods thenended and therefore would be anti-dilutive. The total numbers of such sharesexcluded from the diluted earnings per share calculation are 1,071,000 and973,000 for the thirteen weeks ended July 31, 2010 and August 1, 2009,respectively. The total number of such shares excluded from the dilutedearnings per share calculation are 1,088,000 and 1,355,000 for the twenty-sixweeks ended July 31, 2010 and August 1, 2009, respectively.

 

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NOTE 12. Benefit Plans

 

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

 

The Company also has a frozendefined benefit pension plan covering the Company’s full-time employees hiredon or before February 1, 1992. The Company’s expense for its pension planfollows:

 
| ** **                                       | ** ** | **Thirteen Weeks Ended** | ** ** | **Twenty-six Weeks Ended** | ** ** |
|--------------------------------------------------|------------|------------------------------------|------------|--------------------------------------|------------|
| **(dollar amounts in thousands)** | ** ** | **July 31, 2010**        | ** ** | **August 1, 2009**         | ** ** | **July 31, 2010** | ** ** | **August 1, 2009** | ** ** |
|                                             |       |                               |       |                                 |       |   |   |   |   |
| Interest cost                                    |       | 640                                |       | 649                                  |       | 1,280 |   | 1,270 |   |
| Expected return on plan assets                   |       | (537                               | )          | (365                                 | )          | (1,075 | ) | (902 | ) |
| Amortization of prior service cost               |       | —                             |       | 7                                    |       | — |   | 7 |   |
| Amortization of net loss                         |       | 422                                |       | 559                                  |       | 843 |   | 884 |   |
| Net periodic benefit cost                        |       | $                                  | 525        |                                 | $          | 850 |   | $ | 1,048 |   | $ | 1,259 |   |
|                                                  |            |                                    |            |                                      |            |  |  |  |  |  |  |  |  |

 

NOTE 13. Equity Compensation Plans

 

The Company has stock-basedcompensation plans, under which it grants stock options and restricted stockunits to key employees and members of its Board of Directors. The Companygenerally recognizes compensation expense on a straight-line basis over thevesting period.

 

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

 
| ** **                               | ** ** | **Number of Shares** | ** ** |
|------------------------------------------|------------|--------------------------------|------------|
| Outstanding — January 30, 2010 |       | 1,682,325                      |       |
| Granted                                  |       | 303,056                        |       |
| Exercised                                |       | (32,137                        | )          |
| Forfeited                                |       | (6,066                         | )          |
| Expired                                  |       | (14,500                        | )          |
| Outstanding — July 31, 2010         |       | 1,932,678                      |       |

 

During the twenty-six weeks endedJuly 31, 2010 and August 1, 2009, the Company granted approximately 303,000 and948,000 stock options with a weighted average grant date fair value of $4.26and $2.10, respectively. These options have a seven year term and vest over athree year period with a third vesting on each of the three grant dateanniversaries. The compensation expense recorded during the twenty-six weeksended July 31, 2010 for the options granted was minimal.

 

Of the options granted in fiscalyear 2009, the Company granted 736,000 stock options with a weighted averagegrant date fair value of $1.69. These options have a seven year term andinclude both a service and a market appreciation vesting requirement. Theseoptions vest over a three year period with a third vesting on each of the threegrant date anniversaries, provided the market price of the Company’s stock hasappreciated by a certain amount. From the date of grant, the market price ofthe Company’s stock must have appreciated, for at least 15 consecutive tradingdays, by $2.00 or more above grant price for 536,000 options and by $6.88 ormore above grant price for 200,000 options in order to vest. The Company used aMonte Carlo simulation model to estimate the expected term and is recording thecompensation expense over the service period for each separately vestingportion of the options granted. As of July 31, 2010, the market appreciationrequirements of both grants have been satisfied.

 

Expectedvolatility is based on historical volatilities for a time period similar tothat of the expected term. The risk-free rate is based on the U.S. treasuryyield curve for issues with a remaining term equal to the expected term. Thefair value of each option granted is 

 

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estimatedon the date of grant using the Black-Scholes option-pricing model, and incertain situations where the grant includes both a market and service conditionas described more fully above, using a Monte Carlo simulation.

 

Thefollowing are the weighted-average assumptions:

 
| ** **                        | ** ** | **July 31, 2010** | ** ** | **August 1, 2009** | ** ** |
|-----------------------------------|------------|-------------------|------------|--------------------|------------|
| Dividend yield                    |       | 1.4               | %          | 2.3                | %          |
| Expected volatility               |       | 55.7              | %          | 65.2               | %          |
| Risk-free interest rate range:    |       |              |       |               |       |
| High                              |       | 2.0               | %          | 2.3                | %          |
| Low                               |       | 1.7               | %          | 1.6                | %          |
| Ranges of expected lives in years |       | 4 - 5             |       | 4 - 5              |       |

 

Restricted Stock Units

 

In the first quarter of fiscal2010, the Company granted approximately 105,000 restricted stock units thatwill vest if the employees remain continuously employed through the thirdanniversary date of the grant and the Company achieves certain financialtargets for fiscal year 2012. The number of underlying shares that may beissued upon vesting will range from 0% to 150%, depending upon the Companyachieving the financial targets for fiscal year 2012. The fair value for theseawards was $10.34 at the date of the grant. The compensation expense recordedduring the twenty-six weeks ended July 31, 2010 for these restricted stockunits was minimal.

 

In the first quarter of fiscal2010, the Company also granted approximately 52,000 restricted stock units thatwill vest if the employees remain continuously employed through the thirdanniversary date of the grant and will become exercisable if the Companysatisfies a market condition in fiscal 2012. The number of underlying sharesthat may become exercisable will range from 0% to 175% depending upon whetherthe market condition is achieved. The Company used a Monte Carlo simulation toestimate a $12.99 grant date fair value. The compensation expense recordedduring the twenty-six weeks ended July 3l, 2010 for these restricted stockunits was minimal.

 

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

 

In the first quarter of fiscal2010, the Company granted approximately 61,000 restricted stock units relatedto officer’s deferred bonus match under the Company’s non-qualified deferredcompensation plan, which vest over a three year period. The following tablesummarizes the units under the Company’s plan, assuming maximum vesting ofunderlying shares for performance and market based awards:

 
| ** **                             | ** ** | **Number of RSUs** | ** ** |
|----------------------------------------|------------|------------------------------|------------|
| Nonvested — January 30, 2010 |       | 232,593                      |       |
| Granted                                |       | 362,283                      |       |
| Forfeited                              |       | (3,700                       | )          |
| Vested                                 |       | (122,313                     | )          |
| Nonvested — July 31, 2010         |       | 468,863                      |       |

 

NOTE 14. Fair Value Measurements

 

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

 

Fairvalue is defined as the exit price, or the amount that would be received tosell an asset or paid to transfer a liability in an orderly transaction betweenmarket participants as of the measurement date. There is a hierarchy for inputsused in measuring fair value that maximizes the use of observable inputs andminimizes the use of unobservable inputs by requiring that the most observableinputs be used when available. Observable inputs are inputs market participantswould use in valuing the asset or liability developed based on market dataobtained from sources independent of the Company. Unobservable inputs areinputs that reflect the Company’s assumptions about the factors marketparticipants would use in valuing the asset or liability developed based uponthe best information available in the circumstances. The hierarchy is brokendown into three levels. Level 1 inputs are quoted prices (unadjusted) in activemarkets for identical assets or liabilities. Level 2 inputs include quotedprices for similar assets or liabilities in active markets. Level 3 inputs areunobservable inputs for the asset or liability. Categorization within thevaluation hierarchy is based upon the lowest level of input that is significantto the fair value measurement.

 

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Thefollowing table provides information by level for assets and liabilities thatare measured at fair value, on a recurring basis:

 
| **(dollar amounts in thousands)** | ** ** | **Fair Value  at** | ** ** | **Fair Value Measurements  Using Inputs Considered as** | ** ** |
|--------------------------------------------------|------------|-------------------------|------------|----------------------------------------------------------------------------------|------------|
| **Description**                                  | ** ** | **July 31, 2010**  | ** ** | **Level 1**                                                                 | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
| **Assets:**                                      |       |                    |       |                                                                             |       |   |   |   |   |
| Cash and cash equivalents                        |       | $                       | 92,363     |                                                                             | $          | 92,363 |   |   |   |   |   |
|                                             |       |                    |       |                                                                             |       |   |   |   |   |
| **Liabilities:**                                 |       |                    |       |                                                                             |       |   |   |   |   |
| Current liabilities                              |       |                    |       |                                                                             |       |   |   |   |   |
| Derivative liability (a)                         |       | $                       | 38         |                                                                             |       |   | $ | 38 |   |   |   |
| Contingent consideration (a)                     |       | $                       | 288        |                                                                             |       |   |   |   | $ | 288 |   |
| Other liabilities                                |       |                    |       |                                                                             |       |   |   |   |   |
| Derivative liability (b)                         |       | $                       | 18,980     |                                                                             |       |   | $ | 18,980 |   |   |   |
| Contingent consideration (b)                     |       | $                       | 1,312      |                                                                             |       |   |   |   | $ | 1,312 |   |
|                                                  |            |                         |            |                                                                                  |            |  |  |  |  |  |  |  |  |

 

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(a)          included inaccrued liabilities

(b)         included inother long-term liabilities

 

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

 

The table below shows the effect ofthe Company’s interest rate swap on the condensed consolidated financialstatements for the periods indicated:

 
| **(dollar amounts in thousands)** | ** ** | **Amount of Loss in  Other Comprehensive  Income  (Effective Portion)** | ** ** | **Earnings Statement  Classification** | ** **       | **Amount of Loss  Recognized in Earnings  (Effective Portion) (a)** | ** ** |
|--------------------------------------------------|------------|-------------------------------------------------------------------------|------------|----------------------------------------|------------------|---------------------------------------------------------------------|------------|
| Thirteen weeks ended July 31, 2010               |       | $                                                                       | (1,801     | )                                      | Interest expense |                                                                | $          | (1,753 | ) |
| Twenty-six weeks ended July 31, 2010             |       | $                                                                       | (1,621     | )                                      | Interest expense |                                                                | $          | (3,448 | ) |

 

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

 

In the second quarter of fiscal2010, the Company entered into a price stability agreement (“Agreement”) thatis also designated as a cash flow hedge. This Agreement is intended to hedgethe price risks associated with the market volatility of retail gasoline. Thishedge is deemed to be fully effective and all adjustments in the hedge’s fairvalue have been recorded to accumulated other comprehensive loss. The effect ofthis Agreement on the Company’s condensed consolidated financial statements isimmaterial.

 

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

 

Certainassets are measured at fair value on a non-recurring basis, that is, the assetsare subject to fair value adjustments in certain circumstances such as whenthere is evidence of impairment. These measures of fair value, and relatedinputs, are considered level 2 or level 3 measures under the fair valuehierarchy.

 

Thefair value of the derivatives was $19.0 million and $16.4 million payable atJuly 31, 2010 and January 30, 2010, respectively. Of the $2.5 million increasein the fair value during the twenty-six weeks ended July 31, 2010, $1.6 millionnet of tax was recorded to accumulated other comprehensive loss on thecondensed consolidated balance sheet.

 

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NOTE 15. Legal Matters

 

In September 2006, theUnited States Environmental Protection Agency (“EPA”) requested certaininformation from the Company as part of an investigation to determine whetherthe Company had violated, and is in violation of, the Clean Air Act and itsnon-road engine regulations. The information requested concerned certaingenerator and personal transportation merchandise offered for sale by the Company.In the fourth quarter of fiscal 2008, the EPA informed the Company that itbelieved that the Company had violated the Clean Air Act by virtue of the factthat certain of this merchandise did not conform to their corresponding EPACertificates of Conformity. During the third quarter of fiscal 2009, theCompany and the EPA reached a settlement in principle of this matter requiringthat the Company (i) pay a monetary penalty of $5.0 million,(ii) take certain corrective action with respect to certain inventory thathad been restricted from sale during the course of the investigation,(iii) implement a formal compliance program and (iv) participate incertain non-monetary emission offset activities. The Company had previouslyaccrued an amount equal to the agreed upon civil penalty and a$3.0 million contingency accrual with respect to the restricted inventory.During fiscal 2009, the Company reversed $2.0 million of the inventoryaccrual as a portion of the subject inventory was released for sale. During thesecond quarter of fiscal 2010, the Company reversed the remaining $1.0 millionof the inventory accrual as the Company reached an agreement with themerchandise vendor to cover the entire cost of retrofitting a portion of theremaining subject merchandise and to accept the balance of the subjectinventory for return for full credit. During the second quarter of fiscal 2010,the formal settlement agreement between the Company and the EPA becameeffective and the Company paid the monetary penalty.

 

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

 

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

 

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NOTE 16. Supplemental GuarantorInformation

 

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

 

The following condensedconsolidating information presents, in separate columns, the condensed consolidatingbalance sheets as of July 31, 2010 and January 30, 2010 and the relatedcondensed consolidating statements of operations for the thirteen andtwenty-six weeks ended July 31, 2010 and August 1, 2009 and condensedconsolidating statements of cash flows for the twenty-six weeks ended July 31,2010 and August 1, 2009 for (i) the Company (“Pep Boys”) on a parentonly basis, with its investment in subsidiaries recorded under the equitymethod, (ii) the Subsidiary Guarantors on a combined basis including theconsolidation by PBY Corporation of its wholly owned subsidiary, The Pep BoysManny Moe & Jack of California, (iii) the subsidiary of theCompany that does not guarantee the Notes, and (iv) the Company on aconsolidated basis.

 

CONDENSED CONSOLIDATING BALANCESHEET

(dollars in thousands)

(unaudited)

 
| **As of July 31, 2010**                         | ** ** | **Pep Boys** | ** ** | **Subsidiary  Guarantors** | ** ** | **Subsidiary Non-  Guarantors** | ** ** | **Consolidation/  Elimination** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------|------------|--------------|------------|----------------------------|------------|---------------------------------|------------|---------------------------------|------------|------------------|------------|
| **ASSETS**                                      |       |         |       |                       |       |                            |       |                            |       |             |       |
| Current assets:                                 |       |         |       |                       |       |                            |       |                            |       |             |       |
| Cash and cash equivalents                       |       | $            | 71,665     |                       | $          | 12,911                          |       | $                               | 7,787      |             | $          | — |   | $ | 92,363 |   |
| Accounts receivable, net                        |       | 12,333       |       | 11,871                     |       | —                          |       | —                          |       | 24,204           |       |
| Merchandise inventories                         |       | 192,591      |       | 366,341                    |       | —                          |       | —                          |       | 558,932          |       |
| Prepaid expenses                                |       | 10,694       |       | 8,494                      |       | 7,394                           |       | (5,766                          | )          | 20,816           |       |
| Other current assets                            |       | 765          |       | 2,662                      |       | 56,254                          |       | (8,083                          | )          | 51,598           |       |
| Assets held for disposal                        |       | 903          |       | 875                        |       | —                          |       | —                          |       | 1,778            |       |
| Total current assets                            |       | 288,951      |       | 403,154                    |       | 71,435                          |       | (13,849                         | )          | 749,691          |       |
| Property and equipment—net                 |       | 231,276      |       | 450,934                    |       | 31,203                          |       | (19,151                         | )          | 694,262          |       |
| Investment in subsidiaries                      |       | 1,791,971    |       | —                     |       | —                          |       | (1,791,971                      | )          | —           |       |
| Intercompany receivables                        |       | —       |       | 1,095,616                  |       | 70,340                          |       | (1,165,956                      | )          | —           |       |
| Deferred income taxes                           |       | 10,954       |       | 48,014                     |       | —                          |       | —                          |       | 58,968           |       |
| Other long-term assets                          |       | 16,193       |       | 1,171                      |       | —                          |       | —                          |       | 17,364           |       |
| Total assets                                    |       | $            | 2,339,345  |                       | $          | 1,998,889                       |       | $                               | 172,978    |             | $          | (2,990,927 | ) | $ | 1,520,285 |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**  |       |         |       |                       |       |                            |       |                            |       |             |       |
| Current liabilities:                            |       |         |       |                       |       |                            |       |                            |       |             |       |
| Accounts payable                                |       | $            | 196,676    |                       | $          | —                          |       | $                               | —     |             | $          | — |   | $ | 196,676 |   |
| Trade payable program liability                 |       | 55,280       |       | —                     |       | —                          |       | —                          |       | 55,280           |       |
| Accrued expenses                                |       | 32,861       |       | 55,652                     |       | 146,420                         |       | (8,428                          | )          | 226,505          |       |
| Deferred income taxes                           |       | 11,901       |       | 29,270                     |       | —                          |       | (5,421                          | )          | 35,750           |       |
| Current maturities of long-term debt            |       | 1,079        |       | —                     |       | —                          |       | —                          |       | 1,079            |       |
| Total current liabilities                       |       | 297,797      |       | 84,922                     |       | 146,420                         |       | (13,849                         | )          | 515,290          |       |
| Long-term debt less current maturities          |       | 305,661      |       | —                     |       | —                          |       | —                          |       | 305,661          |       |
| Other long-term liabilities                     |       | 38,474       |       | 37,851                     |       | —                          |       | —                          |       | 76,325           |       |
| Deferred gain from asset sales                  |       | 67,625       |       | 110,703                    |       | —                          |       | (19,151                         | )          | 159,177          |       |
| Intercompany liabilities                        |       | 1,165,956    |       | —                     |       | —                          |       | (1,165,956                      | )          | —           |       |
| Total stockholders’ equity                 |       | 463,832      |       | 1,765,413                  |       | 26,558                          |       | (1,791,971                      | )          | 463,832          |       |
| Total liabilities and stockholders’ equity |       | $            | 2,339,345  |                       | $          | 1,998,889                       |       | $                               | 172,978    |             | $          | (2,990,927 | ) | $ | 1,520,285 |   |

 

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| **As of January 30, 2010**                 | ** ** | **Pep Boys** | ** ** | **Subsidiary  Guarantors** | ** ** | **Subsidiary Non-  Guarantors** | ** ** | **Consolidation/  Elimination** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------|------------|--------------|------------|----------------------------|------------|---------------------------------|------------|---------------------------------|------------|------------------|------------|
| **ASSETS**                                      |       |         |       |                       |       |                            |       |                            |       |             |       |
| Current assets:                                 |       |         |       |                       |       |                            |       |                            |       |             |       |
| Cash and cash equivalents                       |       | $            | 25,844     |                       | $          | 10,279                          |       | $                               | 3,203      |             | $          | — |   | $ | 39,326 |   |
| Accounts receivable, net                        |       | 13,032       |       | 9,951                      |       | —                          |       | —                          |       | 22,983           |       |
| Merchandise inventories                         |       | 195,314      |       | 363,804                    |       | —                          |       | —                          |       | 559,118          |       |
| Prepaid expenses                                |       | 12,607       |       | 15,070                     |       | 14,255                          |       | (17,148                         | )          | 24,784           |       |
| Other current assets                            |       | 1,101        |       | 2,667                      |       | 67,038                          |       | (5,378                          | )          | 65,428           |       |
| Assets held for disposal                        |       | 1,045        |       | 3,393                      |       | —                          |       | —                          |       | 4,438            |       |
| Total current assets                            |       | 248,943      |       | 405,164                    |       | 84,496                          |       | (22,526                         | )          | 716,077          |       |
| Property and equipment—net                 |       | 232,115      |       | 462,128                    |       | 31,544                          |       | (19,337                         | )          | 706,450          |       |
| Investment in subsidiaries                      |       | 1,755,426    |       | —                     |       | —                          |       | (1,755,426                      | )          | —           |       |
| Intercompany receivables                        |       | —       |       | 1,058,132                  |       | 83,953                          |       | (1,142,085                      | )          | —           |       |
| Deferred income taxes                           |       | 11,200       |       | 46,971                     |       | —                          |       | —                          |       | 58,171           |       |
| Other long-term assets                          |       | 17,566       |       | 822                        |       | —                          |       | —                          |       | 18,388           |       |
| Total assets                                    |       | $            | 2,265,250  |                       | $          | 1,973,217                       |       | $                               | 199,993    |             | $          | (2,939,374 | ) | $ | 1,499,086 |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**  |       |         |       |                       |       |                            |       |                            |       |             |       |
| Current liabilities:                            |       |         |       |                       |       |                            |       |                            |       |             |       |
| Accounts payable                                |       | $            | 202,974    |                       | $          | —                          |       | $                               | —     |             | $          | — |   | $ | 202,974 |   |
| Trade payable program liability                 |       | 34,099       |       | —                     |       | —                          |       | —                          |       | 34,099           |       |
| Accrued expenses                                |       | 24,042       |       | 62,106                     |       | 173,429                         |       | (17,161                         | )          | 242,416          |       |
| Deferred income taxes                           |       | 6,626        |       | 28,723                     |       | —                          |       | (5,365                          | )          | 29,984           |       |
| Current maturities of long-term debt            |       | 1,079        |       | —                     |       | —                          |       | —                          |       | 1,079            |       |
| Total current liabilities                       |       | 268,820      |       | 90,829                     |       | 173,429                         |       | (22,526                         | )          | 510,552          |       |
| Long-term debt less current maturities          |       | 306,201      |       | —                     |       | —                          |       | —                          |       | 306,201          |       |
| Other long-term liabilities                     |       | 35,125       |       | 38,808                     |       | —                          |       | —                          |       | 73,933           |       |
| Deferred gain from asset sales                  |       | 69,724       |       | 114,718                    |       | —                          |       | (19,337                         | )          | 165,105          |       |
| Intercompany liabilities                        |       | 1,142,085    |       | —                     |       | —                          |       | (1,142,085                      | )          | —           |       |
| Total stockholders’ equity                 |       | 443,295      |       | 1,728,862                  |       | 26,564                          |       | (1,755,426                      | )          | 443,295          |       |
| Total liabilities and stockholders’ equity |       | $            | 2,265,250  |                       | $          | 1,973,217                       |       | $                               | 199,993    |             | $          | (2,939,374 | ) | $ | 1,499,086 |   |

 

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CONDENSEDCONSOLIDATING STATEMENT OF OPERATIONS

(dollarsin thousands)

(unaudited)

 
| ** **                                                      | ** ** | ** **        | ** ** | **Subsidiary** | ** ** | **Subsidiary Non-** | ** ** | **Consolidation /** | ** ** | ** **       | ** ** |
|-----------------------------------------------------------------|------------|-------------------|------------|----------------|------------|--------------------------|------------|--------------------------|------------|------------------|------------|
| **Thirteen Weeks Ended July 31, 2010** | ** ** | **Pep Boys** | ** ** | **Guarantors** | ** ** | **Guarantors**           | ** ** | **Elimination**          | ** ** | **Consolidated** | ** ** |
|                                                            |       |              |       |           |       |                     |       |                     |       |             |       |
| Merchandise sales                                               |       | $                 | 141,019    |           | $          | 265,160                  |       | $                        | —     |             | $          | — |   | $ | 406,179 |   |
| Service revenue                                                 |       | 35,729            |       | 62,947         |       | —                   |       | —                   |       | 98,676           |       |
| Other revenue                                                   |       | —            |       | —         |       | 5,736                    |       | (5,736                   | )          | —           |       |
| Total revenues                                                  |       | 176,748           |       | 328,107        |       | 5,736                    |       | (5,736                   | )          | 504,855          |       |
| Costs of merchandise sales                                      |       | 99,511            |       | 183,260        |       | —                   |       | (409                     | )          | 282,362          |       |
| Costs of service revenue                                        |       | 31,186            |       | 56,844         |       | —                   |       | (38                      | )          | 87,992           |       |
| Costs of other revenue                                          |       | —            |       | —         |       | 5,091                    |       | (5,091                   | )          | —           |       |
| Total costs of revenues                                         |       | 130,697           |       | 240,104        |       | 5,091                    |       | (5,538                   | )          | 370,354          |       |
| Gross profit from merchandise sales                             |       | 41,508            |       | 81,900         |       | —                   |       | 409                      |       | 123,817          |       |
| Gross profit from service revenue                               |       | 4,543             |       | 6,103          |       | —                   |       | 38                       |       | 10,684           |       |
| Gross profit from other revenue                                 |       | —            |       | —         |       | 645                      |       | (645                     | )          | —           |       |
| Total gross profit                                              |       | 46,051            |       | 88,003         |       | 645                      |       | (198                     | )          | 134,501          |       |
| Selling, general and administrative expenses                    |       | 41,258            |       | 72,576         |       | 89                       |       | (815                     | )          | 113,108          |       |
| Net gain from dispositions of assets                            |       | 2,218             |       | 231            |       | —                   |       | —                   |       | 2,449            |       |
| Operating profit                                                |       | 7,011             |       | 15,658         |       | 556                      |       | 617                      |       | 23,842           |       |
| Non-operating (expense) income                                  |       | (4,163            | )          | 20,313         |       | 617                      |       | (16,146                  | )          | 621              |       |
| Interest expense (income)                                       |       | 16,306            |       | 6,393          |       | (527                     | )          | (15,529                  | )          | 6,643            |       |
| (Loss) earnings from continuing operations before  income taxes |       | (13,458           | )          | 29,578         |       | 1,700                    |       | —                   |       | 17,820           |       |
| Income tax (benefit) expense                                    |       | (5,311            | )          | 11,663         |       | 669                      |       | —                   |       | 7,021            |       |
| Equity in earnings of subsidiaries                              |       | 18,784            |       | —         |       | —                   |       | (18,784                  | )          | —           |       |
| Net earnings from continuing operations                         |       | 10,637            |       | 17,915         |       | 1,031                    |       | (18,784                  | )          | 10,799           |       |
| Discontinued operations, net of tax                             |       | (39               | )          | (162           | )          | —                   |       | —                   |       | (201             | )          |
| Net earnings                                                    |       | $                 | 10,598     |           | $          | 17,753                   |       | $                        | 1,031      |             | $          | (18,784 | ) | $ | 10,598 |   |

 
| ** **                                                       | ** ** | ** **        | ** ** | **Subsidiary** | ** ** | **Subsidiary Non-** | ** ** | **Consolidation /** | ** ** | ** **       | ** ** |
|------------------------------------------------------------------|------------|-------------------|------------|----------------|------------|--------------------------|------------|--------------------------|------------|------------------|------------|
| **Thirteen Weeks Ended August 1, 2009** | ** ** | **Pep Boys** | ** ** | **Guarantors** | ** ** | **Guarantors**           | ** ** | **Elimination**          | ** ** | **Consolidated** | ** ** |
|                                                             |       |              |       |           |       |                     |       |                     |       |             |       |
| Merchandise sales                                                |       | $                 | 133,660    |           | $          | 258,411                  |       | $                        | —     |             | $          | — |   | $ | 392,071 |   |
| Service revenue                                                  |       | 34,046            |       | 62,794         |       | —                   |       | —                   |       | 96,840           |       |
| Other revenue                                                    |       | —            |       | —         |       | 5,722                    |       | (5,722                   | )          | —           |       |
| Total revenues                                                   |       | 167,706           |       | 321,205        |       | 5,722                    |       | (5,722                   | )          | 488,911          |       |
| Costs of merchandise sales                                       |       | 95,456            |       | 180,743        |       | —                   |       | (409                     | )          | 275,790          |       |
| Costs of service revenue                                         |       | 28,951            |       | 56,018         |       | —                   |       | (38                      | )          | 84,931           |       |
| Costs of other revenue                                           |       | —            |       | —         |       | 5,337                    |       | (5,337                   | )          | —           |       |
| Total costs of revenues                                          |       | 124,407           |       | 236,761        |       | 5,337                    |       | (5,784                   | )          | 360,721          |       |
| Gross profit from merchandise sales                              |       | 38,204            |       | 77,668         |       | —                   |       | 409                      |       | 116,281          |       |
| Gross profit from service revenue                                |       | 5,095             |       | 6,776          |       | —                   |       | 38                       |       | 11,909           |       |
| Gross profit from other revenue                                  |       | —            |       | —         |       | 385                      |       | (385                     | )          | —           |       |
| Total gross profit                                               |       | 43,299            |       | 84,444         |       | 385                      |       | 62                       |       | 128,190          |       |
| Selling, general and administrative expenses                     |       | 39,240            |       | 70,720         |       | 77                       |       | (555                     | )          | 109,482          |       |
| Net gain from dispositions of assets                             |       | 13                |       | (29            | )          | —                   |       | —                   |       | (16              | )          |
| Operating profit                                                 |       | 4,072             |       | 13,695         |       | 308                      |       | 617                      |       | 18,692           |       |
| Non-operating (expense) income                                   |       | (4,039            | )          | 21,508         |       | 620                      |       | (17,550                  | )          | 539              |       |
| Interest expense (income)                                        |       | 17,016            |       | 6,904          |       | (521                     | )          | (16,933                  | )          | 6,466            |       |
| (Loss) earnings from continuing operations before  income taxes  |       | (16,983           | )          | 28,299         |       | 1,449                    |       | —                   |       | 12,765           |       |
| Income tax (benefit) expense                                     |       | (7,940            | )          | 12,232         |       | 615                      |       | —                   |       | 4,907            |       |
| Equity in earnings of subsidiaries                               |       | 16,781            |       | —         |       | —                   |       | (16,781                  | )          | —           |       |
| Net earnings from continuing operations                          |       | 7,738             |       | 16,067         |       | 834                      |       | (16,781                  | )          | 7,858            |       |
| Discontinued operations, net of tax                              |       | (3                | )          | (120           | )          | —                   |       | —                   |       | (123             | )          |
| Net earnings                                                     |       | $                 | 7,735      |           | $          | 15,947                   |       | $                        | 834        |             | $          | (16,781 | ) | $ | 7,735 |   |

 

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| ** **                                                      | ** ** | ** **        | ** ** | **Subsidiary** | ** ** | **Subsidiary Non-** | ** ** | **Consolidation /** | ** ** | ** **       | ** ** |
|-----------------------------------------------------------------|------------|-------------------|------------|----------------|------------|--------------------------|------------|--------------------------|------------|------------------|------------|
| **Twenty-six  Weeks Ended July 31, 2010**   | ** ** | **Pep Boys** | ** ** | **Guarantors** | ** ** | **Guarantors**           | ** ** | **Elimination**          | ** ** | **Consolidated** | ** ** |
|                                                            |       |              |       |           |       |                     |       |                     |       |             |       |
| Merchandise sales                                               |       | $                 | 285,444    |           | $          | 529,924                  |       | $                        | —     |             | $          | — |   | $ | 815,368 |   |
| Service revenue                                                 |       | 72,370            |       | 127,150        |       | —                   |       | —                   |       | 199,520          |       |
| Other revenue                                                   |       | —            |       | —         |       | 11,472                   |       | (11,472                  | )          | —           |       |
| Total revenues                                                  |       | 357,814           |       | 657,074        |       | 11,472                   |       | (11,472                  | )          | 1,014,888        |       |
| Costs of merchandise sales                                      |       | 200,507           |       | 366,467        |       | —                   |       | (816                     | )          | 566,158          |       |
| Costs of service revenue                                        |       | 62,356            |       | 114,354        |       | —                   |       | (76                      | )          | 176,634          |       |
| Costs of other revenue                                          |       | —            |       | —         |       | 11,561                   |       | (11,561                  | )          | —           |       |
| Total costs of revenues                                         |       | 262,863           |       | 480,821        |       | 11,561                   |       | (12,453                  | )          | 742,792          |       |
| Gross profit from merchandise sales                             |       | 84,937            |       | 163,457        |       | —                   |       | 816                      |       | 249,210          |       |
| Gross profit from service revenue                               |       | 10,014            |       | 12,796         |       | —                   |       | 76                       |       | 22,886           |       |
| Gross profit from other revenue                                 |       | —            |       | —         |       | (89                      | )          | 89                       |       | —           |       |
| Total gross profit                                              |       | 94,951            |       | 176,253        |       | (89                      | )          | 981                      |       | 272,096          |       |
| Selling, general and administrative expenses                    |       | 81,311            |       | 143,511        |       | 170                      |       | (252                     | )          | 224,740          |       |
| Net gain from dispositions of assets                            |       | 2,080             |       | 414            |       | —                   |       | —                   |       | 2,494            |       |
| Operating profit                                                |       | 15,720            |       | 33,156         |       | (259                     | )          | 1,233                    |       | 49,850           |       |
| Non-operating (expense) income                                  |       | (8,413            | )          | 40,521         |       | 1,233                    |       | (32,136                  | )          | 1,205            |       |
| Interest expense (income)                                       |       | 32,352            |       | 12,851         |       | (1,049                   | )          | (30,903                  | )          | 13,251           |       |
| (Loss) earnings from continuing operations before  income taxes |       | (25,045           | )          | 60,826         |       | 2,023                    |       | —                   |       | 37,804           |       |
| Income tax (benefit) expense                                    |       | (9,856            | )          | 23,905         |       | 796                      |       | —                   |       | 14,845           |       |
| Equity in earnings of subsidiaries                              |       | 37,778            |       | —         |       | —                   |       | (37,778                  | )          | —           |       |
| Net earnings from continuing operations                         |       | 22,589            |       | 36,921         |       | 1,227                    |       | (37,778                  | )          | 22,959           |       |
| Discontinued operations, net of tax                             |       | (41               | )          | (370           | )          | —                   |       | —                   |       | (411             | )          |
| Net earnings                                                    |       | $                 | 22,548     |           | $          | 36,551                   |       | $                        | 1,227      |             | $          | (37,778 | ) | $ | 22,548 |   |

 
| ** **                                                      | ** ** | ** **        | ** ** | **Subsidiary** | ** ** | **Subsidiary Non-** | ** ** | **Consolidation /** | ** ** | ** **       | ** ** |
|-----------------------------------------------------------------|------------|-------------------|------------|----------------|------------|--------------------------|------------|--------------------------|------------|------------------|------------|
| **Twenty-six  Weeks Ended August 1, 2009**  | ** ** | **Pep Boys** | ** ** | **Guarantors** | ** ** | **Guarantors**           | ** ** | **Elimination**          | ** ** | **Consolidated** | ** ** |
|                                                            |       |              |       |           |       |                     |       |                     |       |             |       |
| Merchandise sales                                               |       | $                 | 269,988    |           | $          | 520,260                  |       | $                        | —     |             | $          | — |   | $ | 790,248 |   |
| Service revenue                                                 |       | 68,859            |       | 126,292        |       | —                   |       | —                   |       | 195,151          |       |
| Other revenue                                                   |       | —            |       | —         |       | 11,445                   |       | (11,445                  | )          | —           |       |
| Total revenues                                                  |       | 338,847           |       | 646,552        |       | 11,445                   |       | (11,445                  | )          | 985,399          |       |
| Costs of merchandise sales                                      |       | 191,474           |       | 366,167        |       | —                   |       | (816                     | )          | 556,825          |       |
| Costs of service revenue                                        |       | 57,764            |       | 113,095        |       | —                   |       | (76                      | )          | 170,783          |       |
| Costs of other revenue                                          |       | —            |       | —         |       | 12,142                   |       | (12,142                  | )          | —           |       |
| Total costs of revenues                                         |       | 249,238           |       | 479,262        |       | 12,142                   |       | (13,034                  | )          | 727,608          |       |
| Gross profit from merchandise sales                             |       | 78,514            |       | 154,093        |       | —                   |       | 816                      |       | 233,423          |       |
| Gross profit from service revenue                               |       | 11,095            |       | 13,197         |       | —                   |       | 76                       |       | 24,368           |       |
| Gross profit from other revenue                                 |       | —            |       | —         |       | (697                     | )          | 697                      |       | —           |       |
| Total gross profit                                              |       | 89,609            |       | 167,290        |       | (697                     | )          | 1,589                    |       | 257,791          |       |
| Selling, general and administrative expenses                    |       | 77,222            |       | 139,802        |       | 155                      |       | 356                      |       | 217,535          |       |
| Net gain from dispositions of assets                            |       | 14                |       | (27            | )          | —                   |       | —                   |       | (13              | )          |
| Operating profit                                                |       | 12,401            |       | 27,461         |       | (852                     | )          | 1,233                    |       | 40,243           |       |
| Non-operating (expense) income                                  |       | (8,050            | )          | 42,779         |       | 1,239                    |       | (35,026                  | )          | 942              |       |
| Interest expense (income)                                       |       | 28,400            |       | 14,838         |       | (1,043                   | )          | (33,793                  | )          | 8,402            |       |
| (Loss) earnings from continuing operations before  income taxes |       | (24,049           | )          | 55,402         |       | 1,430                    |       | —                   |       | 32,783           |       |
| Income tax (benefit) expense                                    |       | (11,105           | )          | 24,361         |       | 606                      |       | —                   |       | 13,862           |       |
| Equity in earnings of subsidiaries                              |       | 31,581            |       | —         |       | —                   |       | (31,581                  | )          | —           |       |
| Net earnings from continuing operations                         |       | 18,637            |       | 31,041         |       | 824                      |       | (31,581                  | )          | 18,921           |       |
| Discontinued operations, net of tax                             |       | 7                 |       | (284           | )          | —                   |       | —                   |       | (277             | )          |
| Net earnings                                                    |       | $                 | 18,644     |           | $          | 30,757                   |       | $                        | 824        |             | $          | (31,581 | ) | $ | 18,644 |   |

 

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CONDENSEDCONSOLIDATING STATEMENT OF CASH FLOWS

(dollarsin thousands)

(unaudited)

 
| **Twenty-six Weeks Ended July 31, 2010**                              | ** ** | **Pep Boys** | ** ** | **Subsidiary  Guarantors** | ** ** | **Subsidiary Non-  Guarantors** | ** ** | **Consolidation /  Elimination** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------------------------------------------|------------|-------------------|------------|----------------------------|------------|---------------------------------|------------|---------------------------------------|------------|------------------|------------|
| **Cash flows from operating  activities:**                                                     |       |              |       |                       |       |                            |       |                                  |       |             |       |
| Net earnings                                                                                   |       | $                 | 22,548     |                       | $          | 36,551                          |       | $                                     | 1,227      |             | $          | (37,778 | ) | $ | 22,548 |   |
| Adjustments to reconcile net earnings to net cash  (used in) provided by continuing operations |       | (17,866           | )          | 18,057                     |       | 285                             |       | 36,545                                |       | 37,021           |       |
| Changes in operating assets and liabilities                                                    |       | 12,796            |       | (3,933                     | )          | (9,308                          | )          | —                                |       | (445             | )          |
| Net cash provided by (used in) continuing  operations                                          |       | 17,478            |       | 50,675                     |       | (7,796                          | )          | (1,233                                | )          | 59,124           |       |
| Net cash used in discontinued operations                                                       |       | (43               | )          | (1,206                     | )          | —                          |       | —                                |       | (1,249           | )          |
| Net cash provided by (used in) operating  activities                                           |       | 17,435            |       | 49,469                     |       | (7,796                          | )          | (1,233                                | )          | 57,875           |       |
|                                                                                           |       |              |       |                       |       |                            |       |                                  |       |             |       |
| Net cash used in continuing operations                                                         |       | (13,509           | )          | (9,842                     | )          | —                          |       | —                                |       | (23,351          | )          |
| Net cash provided by discontinued operations                                                   |       | —            |       | 569                        |       | —                          |       | —                                |       | 569              |       |
| Net cash used in investing activities                                                          |       | (13,509           | )          | (9,273                     | )          | —                          |       | —                                |       | (22,782          | )          |
|                                                                                           |       |              |       |                       |       |                            |       |                                  |       |             |       |
| Net cash provided by (used in) financing  activities                                           |       | 41,895            |       | (37,564                    | )          | 12,380                          |       | 1,233                                 |       | 17,944           |       |
|                                                                                           |       |              |       |                       |       |                            |       |                                  |       |             |       |
| Net increase in cash and cash equivalents                                                      |       | 45,821            |       | 2,632                      |       | 4,584                           |       | —                                |       | 53,037           |       |
| Cash and cash equivalents at beginning of period                                               |       | 25,844            |       | 10,279                     |       | 3,203                           |       | —                                |       | 39,326           |       |
| Cash and cash equivalents at end of period                                                     |       | $                 | 71,665     |                       | $          | 12,911                          |       | $                                     | 7,787      |             | $          | — |   | $ | 92,363 |   |

 
| **Twenty-six Weeks Ended August 1, 2009**                             | ** ** | **Pep Boys** | ** ** | **Subsidiary  Guarantors** | ** ** | **Subsidiary Non-  Guarantors** | ** ** | **Consolidation /  Elimination** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------------------------------------------|------------|-------------------|------------|----------------------------|------------|---------------------------------|------------|---------------------------------------|------------|------------------|------------|
| **Cash flows from operating activities:**                                                      |       |              |       |                       |       |                            |       |                                  |       |             |       |
| Net earnings                                                                                   |       | $                 | 18,644     |                       | $          | 30,757                          |       | $                                     | 824        |             | $          | (31,581 | ) | $ | 18,644 |   |
| Adjustments to reconcile net earnings to net cash  (used in) provided by continuing operations |       | (25,378           | )          | 23,636                     |       | 662                             |       | 30,348                                |       | 29,268           |       |
| Changes in operating assets and liabilities                                                    |       | 34,293            |       | 7,631                      |       | (7,665                          | )          | —                                |       | 34,259           |       |
| Net cash provided by (used in) continuing  operations                                          |       | 27,559            |       | 62,024                     |       | (6,179                          | )          | (1,233                                | )          | 82,171           |       |
| Net cash provided by (used in) discontinued  operations                                        |       | 7                 |       | (550                       | )          | —                          |       | —                                |       | (543             | )          |
| Net cash provided by (used in) operating  activities                                           |       | 27,566            |       | 61,474                     |       | (6,179                          | )          | (1,233                                | )          | 81,628           |       |
|                                                                                           |       |              |       |                       |       |                            |       |                                  |       |             |       |
| Net cash used in continuing operations                                                         |       | (9,616            | )          | (7,267                     | )          | —                          |       | —                                |       | (16,883          | )          |
| Net cash provided by discontinued operations                                                   |       | —            |       | 1,758                      |       | —                          |       | —                                |       | 1,758            |       |
| Net cash used in investing activities                                                          |       | (9,616            | )          | (5,509                     | )          | —                          |       | —                                |       | (15,125          | )          |
|                                                                                           |       |              |       |                       |       |                            |       |                                  |       |             |       |
| Net cash (used in) provided by financing  activities                                           |       | (17,691           | )          | (57,494                    | )          | 8,003                           |       | 1,233                                 |       | (65,949          | )          |
|                                                                                           |       |              |       |                       |       |                            |       |                                  |       |             |       |
| Net increase (decrease) in cash and cash  equivalents                                          |       | 259               |       | (1,529                     | )          | 1,824                           |       | —                                |       | 554              |       |
| Cash and cash equivalents at beginning of period                                               |       | 12,753            |       | 6,393                      |       | 2,186                           |       | —                                |       | 21,332           |       |
| Cash and cash equivalents at end of period                                                     |       | $                 | 13,012     |                       | $          | 4,864                           |       | $                                     | 4,010      |             | $          | — |   | $ | 21,886 |   |

 

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

 

OVERVIEW

 

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

 

Introduction

 

The Pep Boys-Manny, Moe &Jack is the only national chain offering automotive service, tires, parts andaccessories. This positioning allows us to streamline the distribution channeland pass the savings on to our customers facilitating our vision of becomingthe automotive solutions provider of choice for the value oriented customer.The majority of our stores are in a Supercenter format, which serves both “do-it-for-me”(“DIFM”, which includes service labor, installed merchandise and tires) and “do-it-yourself”(“DIY”, or retail) customers with the highest quality service offerings andmerchandise. Most of our Supercenters also have a commercial sales program thatprovides delivery of tires, parts and other products to automotive repair shopsand dealers. In 2009, as part of our long-term strategy to lead with automotiveservice, we began complementing our existing Supercenter store base withService & Tire Centers. These Service & Tire Centers aredesigned to capture market share and leverage our existing Supercenter andsupport infrastructure. We opened 24 Service & Tire Centers in fiscal2009 and year-to-date in fiscal 2010 we have opened an additional sevenlocations. We also opened two new (14,000 sq. feet) smaller prototypeSupercenters in fiscal 2010. We are targeting a total of 30 to 40 new locationsin fiscal 2010 and 80 in fiscal 2011. As of July 31, 2010, we operated 555Supercenters and 30 Service & Tire Centers, as well as nine legacy PepBoys Express (retail only) stores throughout 35 states and Puerto Rico.

 

EXECUTIVE SUMMARY

 

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

 

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

 

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

 

Various economic factors affectboth our consumers and our industry. Sales of non-discretionary productcategories are primarily impacted by miles driven, which declined in 2008 butbegan to stabilize beginning in the second half of fiscal 2009, primarily dueto lower gasoline prices. Continued high unemployment and the credit crisishave also modestly benefited our non-discretionary product categories ascustomers have focused on maintaining their existing vehicles rather thanpurchasing new vehicles. These trends, however, have negatively impacted salesin our discretionary product categories like accessories and complementarymerchandise, although the rate of decline has moderated since the beginning offiscal 2010.

 

We continue to focus on refiningand expanding our parts assortment to improve our in stock position, improvingexecution and the customer experience, utilizing television and radioadvertising to communicate our value offerings and growing our rewards programto build customer loyalty and drive repeat business. We believe these effortsare responsible for increased customer traffic in our stores for the thirteenand twenty-six week periods ended July 31, 2010.

 

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RESULTS OF OPERATIONS

 

The following discussion explainsthe material changes in our results of operations.

 

***Analysis of Statement ofOperations***

 

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

 

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

 
| ** **                                               | ** ** | **Percentage of Total Revenues** | ** ** | **Percentage Change**                       | ** ** |
|----------------------------------------------------------|------------|-------------------------------------------------|------------|--------------------------------------------------|------------|
| **Thirteen weeks ended**                       | ** ** | **July 31, 2010  (Fiscal 2010)** | ** ** | **August 1, 2009  (Fiscal 2009)** | ** ** | **Favorable  (Unfavorable)** | ** ** |
|                                                     |       |                                            |       |                                             |       |   |   |
| Merchandise sales                                        |       | 80.5                                            | %          | 80.2                                             | %          | 3.6 | % |
| Service revenue (1)                                      |       | 19.5                                            |       | 19.8                                             |       | 1.9 |   |
| Total revenues                                           |       | 100.0                                           |       | 100.0                                            |       | 3.3 |   |
| Costs of merchandise sales (2)                           |       | 69.5                                            | (3)        | 70.3                                             | (3)        | (2.4 | ) |
| Costs of service revenue (2)                             |       | 89.2                                            | (3)        | 87.7                                             | (3)        | (3.6 | ) |
| Total costs of revenues                                  |       | 73.4                                            |       | 73.8                                             |       | (2.7 | ) |
| Gross profit from merchandise sales                      |       | 30.5                                            | (3)        | 29.7                                             | (3)        | 6.5 |   |
| Gross profit from service revenue                        |       | 10.8                                            | (3)        | 12.3                                             | (3)        | (10.3 | ) |
| Total gross profit                                       |       | 26.6                                            |       | 26.2                                             |       | 4.9 |   |
| Selling, general and administrative expenses             |       | 22.4                                            |       | 22.4                                             |       | (3.3 | ) |
| Net gain (loss) from dispositions of assets              |       | 0.5                                             |       | —                                           |       | NM |   |
| Operating profit                                         |       | 4.7                                             |       | 3.8                                              |       | 27.6 |   |
| Non-operating income                                     |       | 0.1                                             |       | 0.1                                              |       | 15.2 |   |
| Interest expense                                         |       | 1.3                                             |       | 1.3                                              |       | (2.7 | ) |
| Earnings from continuing operations before income  taxes |       | 3.5                                             |       | 2.6                                              |       | 39.6 |   |
| Income tax expense                                       |       | 39.4                                            | (4)        | 38.4                                             | (4)        | (43.1 | ) |
| Earnings from continuing operations                      |       | 2.1                                             |       | 1.6                                              |       | 37.4 |   |
| Discontinued operations, net of tax                      |       | —                                          |       | —                                           |       | (63.4 | ) |
| Net Earnings                                             |       | 2.1                                             |       | 1.6                                              |       | 37.0 |   |

 

----

| (1) |   | Service revenue consists of the  labor charge for installing merchandise or maintaining or repairing vehicles,  excluding the sale of any installed parts or materials.                                                                                                                                                                                                                       |
|-----|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | Costs of merchandise sales  include the cost of products sold, purchasing, warehousing and store  occupancy costs. Costs of service revenue include service center payroll and  related employee benefits and service center occupancy costs. Occupancy costs  include utilities, rents, real estate and property taxes, repairs and  maintenance and depreciation and amortization expenses. |
| (3) |   | As a percentage of related sales  or revenue, as applicable.                                                                                                                                                                                                                                                                                                                                  |
| (4) |   | As a percentage of earnings from  continuing operations before income taxes.                                                                                                                                                                                                                                                                                                                  |

 

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

 

Total merchandise sales increased3.6%, or $14.1 million, to $406.2 million in the second quarter of fiscal 2010,compared to $392.1 million during the prior year period. Comparable storemerchandise sales increased 2.5%, or $9.6 million, as compared to the second 

 

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quarter of 2009, driven primarilyby a higher average transaction amount per customer combined with a slightincrease in comparable store customer count. The balance of the increase inmerchandise sales was due to the contribution from our new stores. Totalservice revenue increased 1.9% to $98.7 million from $96.8 million in the prioryear period primarily due to the contribution from new stores, which was partiallyoffset by a 0.7% decrease in comparable store service revenue.

 

In the second quarter of 2010,comparable store customer counts marginally increased as compared to negativecomparable store customer counts in the prior year period due to our traffic-drivingpromotional events and rewards program, and customer receptiveness to ourimproved in stock position and better store execution. We also experienced a3.5% increase in sales of our core automotive parts categories which make upapproximately 80% of our merchandise sales, which was slightly offset by a 1.4%decrease in sales of our discretionary product categories as compared to theprior year period. We continue to believe that providing a differentiatedmerchandise assortment, better customer experience, value proposition andinnovative marketing will increase sales and customer counts consistently overthe long term across all lines of business.

 

Gross profit from merchandise salesincreased by $7.5 million, or 6.5%, to $123.8 million for the second quarter of2010 from $116.3 million in the second quarter of 2009. Gross profit frommerchandise sales increased to 30.5% for the second quarter of 2010 from 29.7%for the second quarter of 2009. Gross profit from merchandise sales for thesecond quarter of 2010 includes the reversal of inventory accruals of $1.0million mostly offset by an asset impairment charge of $0.8 million. Excludingthese adjustments, gross profit from merchandise sales increased to 30.4% from29.7% in the prior year period. The increase in gross profit margins wasprimarily due to an improvement in inventory shrinkage, lower in-bound freightcosts and lower defective product expense.

 

Gross profit from service revenuedecreased by $1.2 million, or 10.3%, to $10.7 million for the second quarter of2010 from $11.9 million in the second quarter of 2009. Gross profit fromservice revenue decreased to 10.8% from 12.3% for the prior year period. Grossprofit from service revenue for the second quarter of 2010 includes an assetimpairment charge of $0.2 million. Excluding this adjustment, gross profit fromservice revenue decreased to 11.1% from 12.3% in the prior year period. Thedecrease in gross profit was primarily due to higher payroll and occupancycosts (includes such items as rent, utilities and building maintenance), whichincreased by 80 basis points and 116 basis points, respectively, quarter overquarter, primarily due to adding the new Service & Tire Centers.Excluding the impact of the new Service & Tire Centers (which are stillin their ramp up stage for sales but incurring the full fixed expense load),the gross profit from service revenue remained relatively flat quarter overquarter.

 

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

 

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

 

Interest expense of $6.6 millionfor the second quarter of 2010 was relatively flat compared to the prior yearperiod.

 

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

 

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

 

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

 

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

 

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| ** **                                               | ** ** | **Percentage of Total Revenues** | ** ** | **Percentage Change**                             | ** ** |
|----------------------------------------------------------|------------|-------------------------------------------------|------------|--------------------------------------------------------|------------|
| **Twenty-six weeks ended**                     | ** ** | **July 31, 2010  (Fiscal 2010)** | ** ** | **August 1, 2009   (Fiscal 2009)** | ** ** | **Favorable  (Unfavorable)** | ** ** |
|                                                     |       |                                            |       |                                                   |       |   |   |
| Merchandise sales                                        |       | 80.3                                            | %          | 80.2                                                   | %          | 3.2 | % |
| Service revenue (1)                                      |       | 19.7                                            |       | 19.8                                                   |       | 2.2 |   |
| Total revenues                                           |       | 100.0                                           |       | 100.0                                                  |       | 3.0 |   |
| Costs of merchandise sales (2)                           |       | 69.4                                            | (3)        | 70.5                                                   | (3)        | (1.7 | ) |
| Costs of service revenue (2)                             |       | 88.5                                            | (3)        | 87.5                                                   | (3)        | (3.4 | ) |
| Total costs of revenues                                  |       | 73.2                                            |       | 73.8                                                   |       | (2.1 | ) |
| Gross profit from merchandise sales                      |       | 30.6                                            | (3)        | 29.5                                                   | (3)        | 6.8 |   |
| Gross profit from service revenue                        |       | 11.5                                            | (3)        | 12.5                                                   | (3)        | (6.1 | ) |
| Total gross profit                                       |       | 26.8                                            |       | 26.2                                                   |       | 5.5 |   |
| Selling, general and administrative expenses             |       | 22.1                                            |       | 22.1                                                   |       | (3.3 | ) |
| Net gain (loss) from dispositions of assets              |       | 0.2                                             |       | —                                                 |       | NM |   |
| Operating profit                                         |       | 4.9                                             |       | 4.1                                                    |       | 23.9 |   |
| Non-operating income                                     |       | 0.1                                             |       | 0.1                                                    |       | 27.9 |   |
| Interest expense                                         |       | 1.3                                             |       | 0.9                                                    |       | (57.7 | ) |
| Earnings from continuing operations before income  taxes |       | 3.7                                             |       | 3.3                                                    |       | 15.3 |   |
| Income tax expense                                       |       | 39.3                                            | (4)        | 42.3                                                   | (4)        | (7.1 | ) |
| Earnings from continuing operations                      |       | 2.3                                             |       | 1.9                                                    |       | 21.3 |   |
| Discontinued operations, net of tax                      |       | —                                          |       | —                                                 |       | (48.4 | ) |
| Net Earnings                                             |       | 2.2                                             |       | 1.9                                                    |       | 20.9 |   |

 

----

| (1) |   | Service revenue consists of the  labor charge for installing merchandise or maintaining or repairing vehicles,  excluding the sale of any installed parts or materials.                                                                                                                                                                                                                       |
|-----|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | Costs of merchandise sales  include the cost of products sold, purchasing, warehousing and store  occupancy costs. Costs of service revenue include service center payroll and  related employee benefits and service center occupancy costs. Occupancy costs  include utilities, rents, real estate and property taxes, repairs and  maintenance and depreciation and amortization expenses. |
| (3) |   | As a percentage of related sales  or revenue, as applicable.                                                                                                                                                                                                                                                                                                                                  |
| (4) |   | As a percentage of earnings from  continuing operations before income taxes.                                                                                                                                                                                                                                                                                                                  |

 

Total revenue and comparable storesales for the twenty-six weeks ended July 31, 2010 increased 3.0% and1.6%, respectively, as compared to the twenty-six weeks ended August 1,2009. The 1.6% increase in comparable store sales consisted of a 2.1%comparable store merchandise sales increase, offset by a 0.3% comparable storeservice revenue decrease. While our total revenue figures were favorablyimpacted by the opening of the new stores, a new store is not added to ourcomparable store sales until it reaches its 13th month of operation.Non-comparable stores contributed an additional $13.7 million of total revenuein the first half of 2010 as compared to the prior year period. Totalcomparable store sales increased due to growth in customer counts in all threelines of business combined with an increase in the average transaction amountper customer.

 

Gross profit from merchandise salesincreased by $15.8 million, or 6.8%, to $249.2 million for the first half of2010 from $233.4 million in the first half of 2009. Gross profit frommerchandise sales increased to 30.6% from 29.5% for the prior year period. Theincrease in gross profit margins was primarily due to an improvement ininventory shrinkage, lower in-bound freight costs and lower defective productexpense.

 

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

 

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

 

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

 

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

 

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

 

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

 

INDUSTRY COMPARISON

 

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

 

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

 
| ** **                                       | ** ** | **Thirteen Weeks Ended** | ** ** | **Twenty-six Weeks Ended** | ** ** |
|--------------------------------------------------|------------|------------------------------------|------------|--------------------------------------|------------|
| ** **                                       | ** ** | **July 31,**                  | ** ** | **August 1,**                   | ** ** | **July 31,** | ** ** | **August 1,** | ** ** |
| **(Dollar amounts in thousands)** | ** ** | **2010**                           | ** ** | **2009**                             | ** ** | **2009** | ** ** | **2009** | ** ** |
|                                             |       |                               |       |                                 |       |   |   |   |   |
| Retail Sales (1)                                 |       | $                                  | 268,804    |                                 | $          | 259,435 |   | $ | 538,511 |   | $ | 523,846 |   |
| Service Center Revenue (2)                       |       | 236,051                            |       | 229,476                              |       | 476,377 |   | 461,553 |   |
| Total revenues                                   |       | $                                  | 504,855    |                                 | $          | 488,911 |   | $ | 1,014,888 |   | $ | 985,399 |   |
|                                             |       |                               |       |                                 |       |   |   |   |   |
| Gross profit from Retail Sales (3)               |       | $                                  | 78,830     |                                 | $          | 70,746 |   | $ | 158,584 |   | $ | 144,301 |   |
| Gross profit from Service Center Revenue (3)     |       | 55,671                             |       | 57,444                               |       | 113,512 |   | 113,490 |   |
| Total gross profit                               |       | $                                  | 134,501    |                                 | $          | 128,190 |   | $ | 272,096 |   | $ | 257,791 |   |

 

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(1)     Excludesrevenues from installed products.

(2)     Includesrevenues from installed products.

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

 

CAPITAL AND LIQUIDITY

 

Our cash requirements ariseprincipally from (1) the purchase of inventory and capital expendituresrelated to existing and new stores, offices and distribution centers, (2) debtservice and (3) contractual obligations. Cash flows realized through thesales of automotive services, tires, parts and accessories are our primarysource of liquidity. Net cash provided by operating activities was $57.9million in the first half of 2010, as compared to $81.6 million in the prioryear period. While net earnings increased by $11.7 million (net of non-cashadjustments) in the first half of 2010, cash flow from operating activitiesdecreased from the prior year period primarily due to the $16.2 million inventoryreduction we accomplished in the first half of 2009 as we focused on maximizingour inventory investment. Inventory at the end of the current year secondquarter remained flat to fiscal 2009 year-end balances despite the need for theinventory investment in our new locations. This is a result of our continueddisciplined inventory management including reduced seasonal inventorypurchases, inventory lead times and safety stocks. In addition, cash flows fromaccounts payable declined by $16.9 million primarily due to a shift to ourtrade payable financing program (shown as cash flows from financing activitieson the consolidated statement of cash flows). After taking into considerationchanges in the amounts financed under our trade payable 

 

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program, accounts payable improvedby $33.6 million primarily due to increased inventory purchases and the timingof our accounts payable cycle. The ratio of accounts payable to inventory was45.1% at July 31, 2010, and 41.1% at August 1, 2009.

 

Cash used in investing activitieswas $22.8 million for the first half of 2010 as compared to $15.1 million inthe prior year period. During the first half of 2010, we sold four propertiesclassified as held for disposal for net proceeds of $2.9 million, of which $0.6million is included in discontinued operations, and completed one saleleaseback transaction for net proceeds of $1.6 million. During the first halfof 2009, we sold three properties classified as assets held for disposal fornet proceeds of $2.8 million, of which $1.8 million is reported in discontinuedoperations. Capital expenditures in the first half of 2010 increased by $9.8million, to $27.3 million, from $17.5 million for the prior year period.Capital expenditures for the current year were for improvements of our existingstores, offices, distribution centers and for the opening of the newfacilities.

 

Our targeted capital expendituresfor fiscal 2010 are $80.0 million. Our fiscal year 2010 capital expendituresinclude the addition of approximately 30 to 40 new locations and requiredexpenditures for our existing stores, offices and distribution centers. These expendituresare expected to be funded by cash on hand and net cash generated from operatingactivities. Additional capacity, if needed, exists under our existing line ofcredit.

 

In the first half of 2010, cashprovided by financing activities was $17.9 million, as compared to cash used infinancing of $65.9 million in the prior year period. The $83.9 millionimprovement was primarily due to increased usage of our trade payable programof $50.5 million. On April 6, 2009, a previously existing program was replacedby a new program funded by various bank participants who have the ability, butnot the obligation, to purchase, directly from our vendors, account receivablesowed by Pep Boys. This transition temporarily resulted in a net reduction inour trade payable financing program of $29.3 million in the prior year period,as vendors typically participating in the legacy financing program weretemporarily paid on a customary trade payable cycle until such time as theywere able to transition onto the new financing program. In the current year, weincreased the availability under this new financing program to $75.0 millionfrom $50.0 million. As of July 31, 2010, January 30, 2010 and August 1,2009, we had an outstanding balance of $55.3 million, $34.1 million and $2.6million, respectively, (classified as trade payable program liability on thecondensed consolidated balance sheet) under our vendor financing programs.Additionally, in the first half of 2009, we repurchased $17.0 million of ouroutstanding 7.5% Senior Subordinated Notes for $10.7 million and repaid $22.3million of borrowings under our revolving credit agreement.

 

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

 

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

 

NEW ACCOUNTING STANDARDS

 

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

 

In January 2010, theFASB issued ASU 2010-06 “Fair Value Measurements — Improving Disclosures onFair Value Measurements” (“ASU 2010-06”). This guidance requires newdisclosures surrounding transfers in and out of level 1 or 2 in the fair valuehierarchy and also requires that in the reconciliation of level 3 inputs, theentity should report separately information on purchases, sales, issuances orsettlements. The increased disclosures should be reported for each class ofassets or liabilities. ASU 2010-06 also clarifies existing disclosures for thelevel of disaggregating, disclosures about valuation techniques and inputs usedto determine level 2 or 3 fair value measurements and includes conformingamendments to the guidance on employers’ disclosures about postretirementbenefit plan assets. ASU 2010-06 was effective for interim and annual reportingperiods beginning after December 15, 2009 except for the disclosures aboutpurchases, sales, issuances or settlements in the roll forward activity forlevel 3 fair value measurements which are effective for interim and annualperiods beginning after December 15, 2010. The adoption of ASU 2010-06 forrequirements effective December 15, 2009 did not have a material impact onthe Company’s consolidated financial statements. The Company does not believethe adoption of those requirements of ASU 2010-06 which are effective forperiods beginning after December 15, 2010 will have a material impact onits consolidated financial statements.

 

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CRITICAL ACCOUNTING POLICIES ANDESTIMATES

 

Management’s Discussion andAnalysis of Financial Condition and Results of Operations discusses ourcondensed consolidated financial statements, which have been prepared inaccordance with accounting principles generally accepted in the United Statesof America. The preparation of these financial statements requires managementto make estimates and assumptions that affect the reported amounts of assetsand liabilities and the disclosure of contingent assets and liabilities at thedate of the condensed consolidated financial statements and the reportedamounts of revenues and expenses during the reporting period.

 

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

 

FORWARD-LOOKING STATEMENTS

 

Certain statements contained hereinconstitute “forward-looking statements” within the meaning of The PrivateSecurities Litigation Reform Act of 1995. The words “guidance,” “expect,” “anticipate,”“estimates,” “forecasts” and similar expressions are intended to identify suchforward-looking statements. Forward-looking statements include management’sexpectations regarding implementation of its long-term strategic plan, futurefinancial performance, automotive aftermarket trends, levels of competition,business development activities, future capital expenditures, financing sourcesand availability and the effects of regulation and litigation. Although webelieve that the expectations reflected in such forward-looking statements arebased on reasonable assumptions, we can give no assurance that our expectationswill be achieved. Our actual results may differ materially from the resultsdiscussed in the forward-looking statements due to factors beyond our control, includingthe strength of the national and regional economies, retail and commercialconsumers’ ability to spend, the health of the various sectors of theautomotive aftermarket, the weather in geographical regions with a highconcentration of our stores, competitive pricing, the location and number ofcompetitors’ stores, product and labor costs and the additional factorsdescribed in our filings with the Securities and Exchange Commission (SEC). Weassume no obligation to update or supplement forward-looking statements thatbecome untrue because of subsequent events.

 

Item 3. Quantitative andQualitative Disclosures About Market Risk

 

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

 

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

 

The fair value of the derivativeswas $19.0 million and $16.4 million payable at July 31, 2010 andJanuary 30, 2010, respectively. Of the $2.5 million increase in fair valueduring the twenty-six weeks ended July 31, 2010, $1.6 million net of taxwas recorded to accumulated other comprehensive loss on the condensedconsolidated balance sheet.

 

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Item 4.  Controls and Procedures.

 

EVALUATION OF DISCLOSURE CONTROLSAND PROCEDURES

 

Our disclosure controls andprocedures (as defined in Rule 13a-15 of the Securities Exchange Act of1934, as amended (the “Exchange Act”)) are designed to ensure that informationrequired to be disclosed is accumulated and communicated to our management,including our principal executive and principal financial officers, asappropriate to allow timely decisions regarding required disclosure. The termdisclosure controls and procedures means controls and other procedures of anissuer that are designed to ensure that information required to be disclosed bythe issuer in the reports that it files or submits under the Exchange Act (15U.S.C. 78a et seq.) is recorded, processed, summarized and reported, within thetime periods specified in the SEC’s rules and forms. Disclosure controlsand procedures include, without limitation, controls and procedures designed toensure that information required to be disclosed by an issuer in the reportsthat it files or submits under the Exchange Act is accumulated and communicatedto the issuer’s management, including its principal executive and principalfinancial officers, or persons performing similar functions, as appropriate toallow timely decisions regarding required disclosure. The Company’s management,with the participation of the Company’s chief executive officer and chieffinancial officer, evaluated the effectiveness of the Company’s disclosurecontrols and procedures as of the end of the period covered by this report.Based on that evaluation, the chief executive officer and chief financialofficer concluded that our disclosure controls and procedures as of the end ofthe period covered by this report were functioning effectively and providereasonable assurance that the information required to be disclosed by theCompany in reports filed under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in the SEC’srules and forms.

 

CHANGES IN INTERNAL CONTROL OVERFINANCIAL REPORTING

 

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

 

Item 5.  Other Information

 

None.

 

PART II - OTHER INFORMATION

 

Item 1.  Legal Proceedings

 

In September 2006, theUnited States Environmental Protection Agency (“EPA”) requested certaininformation from the Company as part of an investigation to determine whetherthe Company had violated, and is in violation of, the Clean Air Act and itsnon-road engine regulations. The information requested concerned certaingenerator and personal transportation merchandise offered for sale by the Company.In the fourth quarter of fiscal 2008, the EPA informed the Company that itbelieved that the Company had violated the Clean Air Act by virtue of the factthat certain of this merchandise did not conform to their corresponding EPACertificates of Conformity. During the third quarter of fiscal 2009, theCompany and the EPA reached a settlement in principle of this matter requiringthat the Company (i) pay a monetary penalty of $5.0 million,(ii) take certain corrective action with respect to certain inventory thathad been restricted from sale during the course of the investigation,(iii) implement a formal compliance program and (iv) participate incertain non-monetary emission offset activities. The Company had previouslyaccrued an amount equal to the agreed upon civil penalty and a$3.0 million contingency accrual with respect to the restricted inventory.During fiscal 2009, the Company reversed $2.0 million of the inventoryaccrual as a portion of the subject inventory was released for sale. During thesecond quarter of fiscal 2010, the Company reversed the remaining $1.0 millionof the inventory accrual as the Company reached an agreement with themerchandise vendor to cover the entire cost of retrofitting a portion of theremaining subject merchandise and to accept the balance of the subjectinventory for return for full credit. During the second quarter of fiscal 2010,the formal settlement agreement between the Company and the EPA becameeffective and the Company paid the monetary penalty.

 

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

 

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

 

Item 1A.  Risk Factors

 

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

 

Item 2.  Unregistered Sales ofEquity Securities and Use of Proceeds

 

None.

 

Item 3.  Defaults Upon SeniorSecurities

 

None.

 

Item 4.  (Removed andReserved)

 

Item 5.  Other Information

 

None.

 

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Item 6.  Exhibits

 
| (31.1) |   | Certification  of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002                                                  |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                       |
| (31.2) |   | Certification  of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002                                                  |
|   |   |                                                                                                                                                       |
| (32.1) |   | Chief  Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|   |   |                                                                                                                                                       |
| (32.2) |   | Chief  Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |

 

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SIGNATURES

 

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

 

 
|   |                    | THE  PEP BOYS - MANNY, MOE & JACK                                                                            |
|--------|-------------------------|-----------------------------------------------------------------------------------------------------------------------|
|   |                    | (Registrant)                                                                                                          |
|   |                    |                                                                                                                  |   |
| Date:  | September 8,  2010 | by:                                                                                                                   | /s/  Raymond L. Arthur |
|   |                    |                                                                                                                  |   |
|   |                    | Raymond  L. Arthur                                                                                                    |
|   |                    | Executive  Vice President and Chief Financial Officer  (Principal Financial Officer and Principal Accounting Officer) |

 

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INDEX TO EXHIBITS

 
| (31.1) |   | Certification  of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002                                                  |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                       |
| (31.2) |   | Certification  of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002                                                  |
|   |   |                                                                                                                                                       |
| (32.1) |   | Chief  Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|   |   |                                                                                                                                                       |
| (32.2) |   | Chief  Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |

 

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