**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

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**FORM 10-Q**
| **(Mark One)**                                       |
|------------------------------------------------------|
| ** **                                           | ** ** | ** ** |
| **x**                                                | ** ** | **Quarterly Report Pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934** |
| ** **                                           | ** ** | ** ** |
| **For the  quarterly period ended October 28, 2006** |
| ** **                                           | ** ** | ** ** |
| **OR**                                               |
| ** **                                           | ** ** | ** ** |
| **o**                                                | ** ** | **Transition Report Pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934** |

 

**For the transition period from            to            **

**Commission File No. 1-3381**

**ThePep Boys - Manny, Moe & Jack**

(Exactname of registrant as specified 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’stelephone number, including area code)

 

Indicate by check markwhether the registrant (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

Indicate by checkmarkwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Largeaccelerated filer  o   Acceleratedfiler  x   Non-acceleratedfiler  o

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

As of November 24, 2006 there were 54,394,431 sharesof the registrant’s Common Stock outstanding.

 

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| Index                           |                                                                                                                |   |
|---------------------------------|---------------------------------------------------------------------------------------------------------------------|--------|
|                            |                                                                                                                |   |
| PART  I - FINANCIAL INFORMATION |                                                                                                                |
|                            |                                                                                                                |   |
| Item 1.                         | Condensed Consolidated Financial Statements  (Unaudited)                                                            | 3      |
|                            |                                                                                                                |   |
|                            | Consolidated  Balance Sheets – October 28, 2006 and January 28, 2006                                           | 3      |
|                            |                                                                                                                |   |
|                            | Consolidated Statements of Operations - Thirteen and  Thirty-nine Weeks Ended October 28, 2006 and October 29, 2005 | 4      |
|                            |                                                                                                                |   |
|                            | Consolidated Statements of Cash Flows - Thirty-nine  Weeks Ended October 28, 2006 and October 29, 2005              | 5      |
|                            |                                                                                                                |   |
|                            | Notes to Condensed Consolidated Financial Statements                                                                | 6-21   |
|                            |                                                                                                                |   |
| Item 2.                         | Management’s Discussion and Analysis of Financial Condition  and Results of Operations                         | 22-29  |
|                            |                                                                                                                |   |
| Item 3.                         | Quantitative and Qualitative Disclosures About Market  Risk                                                         | 30     |
|                            |                                                                                                                |   |
| Item 4.                         | Controls and Procedures                                                                                             | 30     |
|                            |                                                                                                                |   |
| PART  II - OTHER INFORMATION    | 30                                                                                                                  |
|                            |                                                                                                                |   |
| Item  1.                        | Legal  Proceedings                                                                                                  | 30     |
|                            |                                                                                                                |   |
| Item 1A.                        | Risk Factors                                                                                                        | 31     |
|                            |                                                                                                                |   |
| Item 2.                         | Unregistered Sales of Equity Securities and Use of  Proceeds                                                        | 31     |
|                            |                                                                                                                |   |
| Item 3.                         | Defaults Upon Senior Securities                                                                                     | 31     |
|                            |                                                                                                                |   |
| Item 4.                         | Submission of Matters to a Vote of Security Holders                                                                 | 31     |
|                            |                                                                                                                |   |
| Item  5.                        | Other  Information                                                                                                  | 31     |
|                            |                                                                                                                |   |
| Item 6.                         | Exhibits                                                                                                            | 31-32  |
|                            |                                                                                                                |   |
| SIGNATURES                      | 33                                                                                                                  |
|                            |                                                                                                                |   |
| INDEX TO EXHIBITS               | 34                                                                                                                  |

 

2

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PART I- FINANCIAL INFORMATION

Item 1. CondensedConsolidated Financial Statements (Unaudited)

THE PEP BOYS -MANNY, MOE & JACK AND SUBSIDIARIES

CONSOLIDATEDBALANCE SHEETS

(dollar amounts inthousands, except share data)

UNAUDITED
| ** **                                                                                      | ** ** | **October 28, 2006** | ** ** | **Jan. 28, 2006*** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|------------------------------|------------|
| ASSETS                                                                                          |       |                           |       |                         |       |
| Current Assets:                                                                                 |       |                           |       |                         |       |
| Cash and cash  equivalents                                                                      |       | $                              | 22,492     |                         | $          | 48,281 |   |
| Accounts  receivable, net                                                                       |       | 29,488                         |       | 36,434                       |       |
| Merchandise  inventories                                                                        |       | 645,394                        |       | 616,292                      |       |
| Prepaid expenses                                                                                |       | 25,151                         |       | 40,952                       |       |
| Other                                                                                           |       | 59,001                         |       | 85,446                       |       |
| Assets held for  disposal                                                                       |       | —                         |       | 652                          |       |
| Total Current  Assets                                                                           |       | 781,526                        |       | 828,057                      |       |
| Property and  Equipment-at cost:                                                                |       |                           |       |                         |       |
| Land                                                                                            |       | 256,865                        |       | 257,802                      |       |
| Buildings and  improvements                                                                     |       | 919,543                        |       | 916,580                      |       |
| Furniture,  fixtures and equipment                                                              |       | 667,101                        |       | 671,189                      |       |
| Construction in  progress                                                                       |       | 17,896                         |       | 15,858                       |       |
|                                                                                            |       | 1,861,405                      |       | 1,861,429                    |       |
| Less accumulated  depreciation and amortization                                                 |       | 952,867                        |       | 914,040                      |       |
|                                                                                            |       |                           |       |                         |       |
| Property and  Equipment - Net                                                                   |       | 908,538                        |       | 947,389                      |       |
| Other                                                                                           |       | 79,547                         |       | 46,307                       |       |
| Total Assets                                                                                    |       | $                              | 1,769,611  |                         | $          | 1,821,753 |   |
|                                                                                            |       |                           |       |                         |       |
| LIABILITIES AND STOCKHOLDERS’  EQUITY                                                      |       |                           |       |                         |       |
| Current  Liabilities:                                                                           |       |                           |       |                         |       |
| Accounts payable                                                                                |       | $                              | 308,683    |                         | $          | 261,940 |   |
| Trade payable  program liability                                                                |       | 13,284                         |       | 11,156                       |       |
| Accrued expenses                                                                                |       | 267,218                        |       | 290,761                      |       |
| Deferred income  taxes                                                                          |       | 18,909                         |       | 15,417                       |       |
| Current  maturities of long-term debt and obligations under capital leases                      |       | 2,686                          |       | 1,257                        |       |
| Total Current  Liabilities                                                                      |       | 610,780                        |       | 580,531                      |       |
| Long-term debt  and obligations under capital leases, less current maturities                   |       | 524,426                        |       | 467,239                      |       |
| Convertible  long-term debt                                                                     |       | —                         |       | 119,000                      |       |
| Other long-term  liabilities                                                                    |       | 58,762                         |       | 57,481                       |       |
| Deferred income  taxes                                                                          |       | —                         |       | 2,937                        |       |
| Commitments and  Contingencies                                                                  |       |                           |       |                         |       |
| Stockholders’ Equity:                                                                      |       |                           |       |                         |       |
| Common Stock,  par value $1 per share: Authorized 500,000,000 shares; Issued 68,557,041  shares |       | 68,557                         |       | 68,557                       |       |
| Additional  paid-in capital                                                                     |       | 289,718                        |       | 288,098                      |       |
| Retained  earnings                                                                              |       | 460,013                        |       | 481,926                      |       |
| Accumulated  other comprehensive loss                                                           |       | (4,209                         | )          | (3,565                       | )          |
| Less cost of  shares in treasury - 12,015,192 shares and 12,152,968 shares                      |       | (179,172                       | )          | (181,187                     | )          |
| Less cost of  shares in benefits trust - 2,195,270 shares                                       |       | (59,264                        | )          | (59,264                      | )          |
| Total  Stockholders’ Equity                                                                |       | 575,643                        |       | 594,565                      |       |
| Total Liabilities and  Stockholders’ Equity                                                |       | $                              | 1,769,611  |                         | $          | 1,821,753 |   |

 

See notes to condensedconsolidated financial statements.

3

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THE PEP BOYS -MANNY, MOE & JACK AND SUBSIDIARIES

CONSOLIDATEDSTATEMENTS OF OPERATIONS

(dollar amounts inthousands, except per share amounts)

UNAUDITED
| ** **                                                                                                    | ** ** | **Thirteen Weeks Ended** | ** ** | **Thirty-nine Weeks Ended** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                                    | ** ** | **October 28,  2006**         | ** ** | **October 29,  2005**            | ** ** | **October 28,  2006** | ** ** | **October 29,  2005** | ** ** |
| ** **                                                                                                    | ** ** | **Amount**                         | ** ** | **Amount**                            | ** ** | **Amount** | ** ** | **Amount** | ** ** |
| Merchandise  Sales                                                                                            |       | $                                  | 453,711    |                                  | $          | 452,356 |   | $ | 1,393,023 |   | $ | 1,396,812 |   |
| Service Revenue                                                                                               |       | 97,138                             |       | 93,548                                |       | 292,992 |   | 290,736 |   |
| Total Revenues                                                                                                |       | 550,849                            |       | 545,904                               |       | 1,686,015 |   | 1,687,548 |   |
| Costs of  Merchandise Sales                                                                                   |       | 323,025                            |       | 337,899                               |       | 995,447 |   | 1,031,113 |   |
| Costs of Service  Revenue                                                                                     |       | 90,131                             |       | 88,892                                |       | 268,895 |   | 259,580 |   |
| Total Costs of  Revenues                                                                                      |       | 413,156                            |       | 426,791                               |       | 1,264,342 |   | 1,290,693 |   |
| Gross Profit  from Merchandise Sales                                                                          |       | 130,686                            |       | 114,457                               |       | 397,576 |   | 365,699 |   |
| Gross Profit  from Service Revenue                                                                            |       | 7,007                              |       | 4,656                                 |       | 24,097 |   | 31,156 |   |
| Total Gross  Profit                                                                                           |       | 137,693                            |       | 119,113                               |       | 421,673 |   | 396,855 |   |
| Selling, General  and Administrative Expenses                                                                 |       | 139,255                            |       | 127,037                               |       | 410,020 |   | 395,367 |   |
| Net Gain (Loss)  from Sales of Assets                                                                         |       | 213                                |       | (629                                  | )          | 6,229 |   | 2,977 |   |
| Operating (Loss)  Profit                                                                                      |       | (1,349                             | )          | (8,553                                | )          | 17,882 |   | 4,465 |   |
| Non-operating  Income                                                                                         |       | 1,017                              |       | 526                                   |       | 5,294 |   | 2,747 |   |
| Interest Expense                                                                                              |       | 15,581                             |       | 9,205                                 |       | 37,886 |   | 27,354 |   |
| Loss From  Continuing Operations Before Income Taxes and Cumulative Effect of Change in  Accounting Principle |       | (15,913                            | )          | (17,232                               | )          | (14,710 | ) | (20,142 | ) |
| Income Tax  Benefit                                                                                           |       | (5,200                             | )          | (5,856                                | )          | (4,600 | ) | (7,212 | ) |
| Net Loss from  Continuing Operations Before Cumulative Effect of Change in Accounting  Principle              |       | (10,713                            | )          | (11,376                               | )          | (10,110 | ) | (12,930 | ) |
|                                                                                                          |       |                               |       |                                  |       |   |   |   |   |
| Discontinued  Operations, Net of Tax                                                                          |       | (205                               | )          | 180                                   |       | (338 | ) | 3 |   |
| Cumulative  Effect of Change in Accounting Principle, Net of Tax                                              |       | 4                                  |       | —                                |       | 183 |   | — |   |
| Net Loss                                                                                                      |       | (10,914                            | )          | (11,196                               | )          | (10,265 | ) | (12,927 | ) |
| Retained  Earnings, beginning of period                                                                       |       | 474,858                            |       | 525,703                               |       | 481,926 |   | 536,780 |   |
| Cash Dividends                                                                                                |       | (3,691                             | )          | (3,664                                | )          | (11,207 | ) | (10,984 | ) |
| Effect of Stock  Options                                                                                      |       | (209                               | )          | (257                                  | )          | (285 | ) | (2,231 | ) |
| Dividend  Reinvestment Plan                                                                                   |       | (31                                | )          | (54                                   | )          | (156 | ) | (106 | ) |
| Retained  Earnings, end of period                                                                             |       | $                                  | 460,013    |                                  | $          | 510,532 |   | $ | 460,013 |   | $ | 510,532 |   |
| Basic and  Diluted Loss per Share:                                                                            |       |                               |       |                                  |       |   |   |   |   |
| Basic and  Diluted Weighted Average Shares Outstanding                                                        |       | 54,313                             |       | 54,774                                |       | 54,264 |   | 55,288 |   |
| Net Loss From Continuing Operations Before  Cumulative Effect of Change in Accounting Principle               |       | $                                  | (0.20      | )                                     | $          | (0.21 | ) | $ | (0.19 | ) | $ | (0.23 | ) |
| Discontinued Operations, Net of Tax                                                                           |       | —                             |       | 0.01                                  |       | — |   | — |   |
| Cumulative Effect of Change in Accounting Principle,  Net of Tax                                              |       | —                             |       | —                                |       | — |   | — |   |
| Basic and  Diluted Loss Per Share                                                                             |       | $                                  | (0.20      | )                                     | $          | (0.20 | ) | $ | (0.19 | ) | $ | (0.23 | ) |
| Cash Dividends Per  Share                                                                                     |       | $                                  | 0.0675     |                                  | $          | 0.0675 |   | $ | 0.1350 |   | $ | 0.1350 |   |

 

See notes to condensedconsolidated financial statements.

4

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THE PEP BOYS -MANNY, MOE & JACK AND SUBSIDIARIES

CONSOLIDATEDSTATEMENTS OF CASH FLOWS

(dollar amounts inthousands)

UNAUDITED
| **Thirty-nine Weeks Ended**                                             | ** ** | **October 28, 2006** | ** ** | **October 29, 2005** | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------------|------------|--------------------------------|------------|
| Cash Flows from  Operating Activities:                                            |       |                           |       |                           |       |
| Net loss                                                                          |       | $                              | (10,265    | )                              | $          | (12,927 | ) |
| Adjustments to Reconcile Net Loss to Net Cash  Provided by Continuing Operations: |       |                           |       |                           |       |
| Net loss (gain) from discontinued operations                                      |       | 338                            |       | (3                             | )          |
| Depreciation and amortization                                                     |       | 62,546                         |       | 59,283                         |       |
| Cumulative effect of change in accounting principle,  net of tax                  |       | (183                           | )          | —                         |       |
| Accretion of asset disposal obligation                                            |       | 203                            |       | 84                             |       |
| Loss on defeasance of convertible debt                                            |       | 755                            |       | —                         |       |
| Stock compensation expense                                                        |       | 2,611                          |       | 2,001                          |       |
| Cancellation of vested stock options                                              |       | (1,056                         | )          | —                         |       |
| Deferred income taxes                                                             |       | (7,366                         | )          | (12,337                        | )          |
| Gain from sales of assets                                                         |       | (6,229                         | )          | (2,977                         | )          |
| Loss from asset impairment                                                        |       | 550                            |       | —                         |       |
| Excess tax benefits from stock based awards                                       |       | (37                            | )          | —                         |       |
| Increase in cash surrender value of life insurance  policies                      |       | (1,593                         | )          | (2,575                         | )          |
| Changes in Operating Assets and Liabilities:                                      |       |                           |       |                           |       |
| Decrease in accounts receivable, prepaid expenses  and other                      |       | 50,150                         |       | 51,789                         |       |
| Increase in merchandise inventories                                               |       | (29,102                        | )          | (45,608                        | )          |
| Increase (decrease) in accounts payable                                           |       | 46,743                         |       | (6,861                         | )          |
| Decrease in accrued expenses                                                      |       | (24,998                        | )          | (44,075                        | )          |
| Increase in other long-term liabilities                                           |       | 1,281                          |       | 14,918                         |       |
| Net cash provided by continuing operations                                        |       | 84,348                         |       | 712                            |       |
| Net cash used in discontinued operations                                          |       | (367                           | )          | (259                           | )          |
| Net Cash Provided  by Operating Activities                                        |       | 83,981                         |       | 453                            |       |
|                                                                              |       |                           |       |                           |       |
| Cash Flows from  Investing Activities:                                            |       |                           |       |                           |       |
| Cash paid for property and equipment                                              |       | (25,092                        | )          | (65,197                        | )          |
| Proceeds from sales of assets                                                     |       | 1,598                          |       | 1,724                          |       |
| Proceeds from sales of assets held for disposal                                   |       | 6,981                          |       | 6,913                          |       |
| Repayment of life insurance proceeds                                              |       | (24,669                        | )          | —                         |       |
| Premiums paid on life insurance policies                                          |       | —                         |       | (488                           | )          |
| Net cash used in continuing operations                                            |       | (41,182                        | )          | (57,048                        | )          |
| Net cash provided by discontinued operations                                      |       | —                         |       | 916                            |       |
| Net Cash Used in  Investing Activities                                            |       | (41,182                        | )          | (56,132                        | )          |
|                                                                              |       |                           |       |                           |       |
| Cash Flows from  Financing Activities:                                            |       |                           |       |                           |       |
| Net (payments) borrowings under line of credit  agreements                        |       | (60,042                        | )          | 62,163                         |       |
| Excess tax benefits from stock based awards                                       |       | 37                             |       | —                         |       |
| Net borrowings on trade payable program liability                                 |       | 2,128                          |       | 11,212                         |       |
| Proceeds from term loan                                                           |       | 121,000                        |       | —                         |       |
| Repayment of long-term debt                                                       |       | (2,259                         | )          | (40,456                        | )          |
| Defeasance of convertible-debt                                                    |       | (119,000                       | )          | —                         |       |
| Payments on capital lease obligations                                             |       | (167                           | )          | (363                           | )          |
| Dividends paid                                                                    |       | (11,207                        | )          | (10,984                        | )          |
| Repurchase of common stock                                                        |       | —                         |       | (15,562                        | )          |
| Proceeds from exercise of stock options                                           |       | 242                            |       | 2,711                          |       |
| Proceeds from dividend reinvestment plan                                          |       | 680                            |       | 734                            |       |
| Net Cash (Used  in) Provided by Financing Activities                              |       | (68,588                        | )          | 9,455                          |       |
| Net Decrease in  Cash and Cash Equivalents                                        |       | (25,789                        | )          | (46,224                        | )          |
| Cash and Cash  Equivalents at Beginning of Period                                 |       | 48,281                         |       | 82,758                         |       |
| Cash and Cash  Equivalents at End of Period                                       |       | $                              | 22,492     |                           | $          | 36,534 |   |
|                                                                              |       |                           |       |                           |       |
| Supplemental  Disclosure of Cash Flow Information                                 |       |                           |       |                           |       |
| Cash paid for  interest, net of amounts capitalized                               |       | $                              | 34,246     |                           | $          | 19,491 |   |
| Cash paid for  income taxes                                                       |       | $                              | 730        |                           | $          | — |   |
| Cash received  from income tax refunds                                            |       | $                              | —     |                           | $          | 8,605 |   |
| Non-cash  investing activities:                                                   |       |                           |       |                           |       |
| Accrued purchases of property and equipment                                       |       | $                              | 757        |                           | $          | 2,182 |   |
| Non-cash  financing activities:                                                   |       |                           |       |                           |       |
| Equipment  capital leases                                                         |       | $                              | 84         |                           | $          | 124 |   |

 

See notes to condensedconsolidated financial statements.

5

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THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES

NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. CondensedConsolidated Financial Statements

The consolidated balancesheet as of October 28, 2006, the consolidated statements of operations for thethirteen and thirty-nine weeks ended October 28, 2006 and October 29, 2005 andthe consolidated statements of cash flows for the thirty-nine weeks endedOctober 28, 2006 and October 29, 2005 are unaudited. In the opinion ofmanagement, all adjustments necessary to present fairly the financial position,results of operations and cash flows at October 28, 2006 and for all periodspresented have been made.

Certain information andfootnote disclosures normally included in financial statements prepared in accordancewith accounting principles generally accepted in the United States of Americahave been condensed or omitted, as permitted by Rule 10-01 of the Securityand Exchange Commission’s (SEC) Regulation S-X, “Interim Financial Statements”.It is suggested that these condensed consolidated financial statements be readin conjunction with the financial statements and notes thereto included in theCompany’s Annual Report on Form 10-K for the fiscal year ended January 28, 2006(fiscal 2005). The results of operations for the thirteen and thirty-nine weeksended October 28, 2006 are not necessarily indicative of the operating resultsfor the full year.

The statements ofoperations for the thirteen and thirty-nine weeks ended October 29, 2005 havebeen reclassified to present Net Gain from Sales of Assets as a separate lineitem. For the thirteen and thirty-nine weeks ended October 29, 2005, theprimary impact of the reclassification was a decrease of approximately $629,000and an increase of approximately $2,977,000, respectively, to both Costs ofMerchandise Sales and Total Costs of Revenues, with a corresponding decrease toboth Gross Profit from Merchandise Sales and Total Gross Profit.

Certain reclassificationsregarding discontinued operations have also been made to the prior year’sconsolidated financial statements to conform to the current year’s presentation— See Note 6.

NOTE 2. New AccountingStandards

InDecember 2004, the Financial Accounting Standards Board (FASB) issuedStatement of Financial Accounting Standards No. 123 (revised 2004), “Share-BasedPayment” (SFAS No. 123R) requiring that the compensation cost relating toshare-based payment transactions be recognized in financial statements. TheCompany adopted SFAS No. 123R on January 29, 2006 using the modifiedprospective method. The impact of adopting this Standard is discussed in Note3.

In June of 2006,the FASB ratified the consensus reached by the Emerging Issues Task Force onIssue 06-3, How Taxes Collected from Customers and Remitted to GovernmentalAuthorities Should be Presented in the Income Statement (That Is, Gross versusNet Presentation). The scope of this consensus includes any tax assessedby a governmental authority that is directly imposed on a revenue-producingtransaction between a seller and a customer and may include, but is not limitedto sales, use, value added and some excise taxes. Additionally, thisconsensus seeks to address how a company should address the disclosure of suchitems in interim and annual financial statements, either gross or net pursuantto APB Opinion No. 22, Disclosure of Accounting Policies. The Companyis required to adopt this statement in fiscal 2007. The Companypresents sales net of sales taxes in its consolidated statement of operationsand does not anticipate changing its policy as a result of EITF 06-3.

In July of 2006,the FASB released FASB Interpretation No. 48, Accounting for Uncertaintyin Income Taxes - an Interpretation of FASB Statement 109 (FIN 48). FIN 48prescribes a model for the recognition and measurement of a tax position takenor expected to be taken in a tax return, and provides guidance onderecognition, classification, interest and penalties, disclosure andtransition. The Company is required to adopt this Interpretation in fiscal2007, and is currently evaluating the effect that this Interpretation will haveon its consolidated financial statements.

In September2006, the SEC issued Staff Accounting Bulletin No. 108 (SAB 108). SAB 108provides interpretive guidance on the consideration of the effects of prioryear misstatements in quantifying current year financial statementmisstatements for the purpose of a materiality assessment. The Company will berequired to adopt the provisions of SAB 108 in its first year ending after November15, 2006. The Company does not expect the adoption of this statement to have amaterial impact on its consolidated financial statements.

In September 2006, the FASB issued SFASNo. 157, “Fair Value Measurements” (SFAS 157).  SFAS 157 defines the term fair value,establishes a framework for measuring it within generally accepted accounting principlesand expands disclosures about its measurements. SFAS 157 is effective for financial statements issued for fiscal yearsbeginning after 

6

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November 15, 2007.  The Company does notexpect the adoption of this statement to have a material impact on its consolidated financial statements.

In September 2006,the FASB issued SFAS No. 158, “Employers’ Accounting for Defined BenefitPension and Other Postretirement Plans- an Amendment of FASB Statements No. 87,88, 106 and 132(R)” (SFAS 158).  SFAS 158requires entities to recognize the overfunded or underfunded status of itsdefined benefit postretirement plan (other than a multiemployer plan) as anasset or liability in its statement of financial position and to recognizechanges in such funded status in the year in which the changes occur throughcomprehensive income.  Additionally, an entity’sdefined benefit plan assets and obligations must be measured as of the date ofthe entity’s fiscal year end statement of financial position (with limitedexception).  The funded statusrequirement under SFAS 158 is effective for financial statements issued forfiscal years ending after December 15, 2006, while the measurement daterequirement is effective as of the date of the entity’s fiscal year-endstatement of financial position for fiscal years ending after December 15,2008. Upon adoption the Company expects to reduce comprehensive income on itsFebruary 3, 2007 consolidated statement of financial position by theelimination of a prepaid intangible asset and the creation of an additionalliability.

NOTE 3. Accounting forStock-Based Compensation

The Company has astock-based compensation plan originally approved by the stockholders onMay 21, 1990 under which it has previously granted non-qualified stockoptions and incentive stock options to key employees and members of its Boardof Directors. As of October 28, 2006, there were no awards remaining availablefor grant under the 1990 Plan. The Company has a stock-based compensation planoriginally approved by the stockholders on June 2, 1999 under which it haspreviously granted and may continue to grant non-qualified stock options, incentivestock options and restricted stock units (RSUs) to key employees and members ofits Board of Directors. As of October 28, 2006, there were 1,635,387 awardsremaining available for grant under the 1999 Plan.

Incentive stock options and non-qualified stockoptions previously granted under the plans (i) to non-officers, vest fullyon the third anniversary of their grant date and (ii) to officers, vestover a four-year period, with one-fifth vesting on each of the grant date andthe next four anniversaries thereof. Generally, options granted prior toMarch 3, 2004 carry an expiration date of ten years and options granted onor after March 3, 2004 carry an expiration date of seven years.

RSUs previously grantedto non-officers vest fully on the third anniversary of their grant date. RSUspreviously granted to officers (i) on or prior to January 28, 2006,generally vest over a four-year period with one-fifth vesting on each of thegrant date and the next four anniversaries thereof and (ii) afterJanuary 28, 2006, generally vest over a four-year period with one-fourthvesting on each of the first four anniversaries of the grant date.

The Company has alsogranted RSUs under the 1999 plan in conjunction with its non-qualified deferredcompensation plan. Under the deferred compensation plan, the first 20% of anofficer’s bonus deferred into the Company’s stock fund is matched by theCompany on a one-for-one basis with RSUs that vest over a three-year period,with one third vesting on each of the first three anniversaries of the grantdate.

The exercise price, termand other conditions applicable to future stock option and RSU grants under the1999 plan are generally determined by the Board of Directors; provided that theexercise price of stock options must be at least 100% of the quoted marketprice of the common stock on the grant date. The Company currently satisfiesshare requirements resulting from RSU conversions and option exercises from itsTreasury. The Company believes its Treasury share balance at October 28, 2006is adequate to satisfy such activity during the next twelve-month period.

EffectiveJanuary 29, 2006, the Company adopted the provisions of Statement ofFinancial Accounting Standards No. 123 (revised 2004), “Share-BasedPayment” (SFAS No.123R) requiring that compensation cost relating toshare-based payment transactions be recognized in the financial statements. Thecost is measured at the grant date, based on the calculated fair value of theaward, and is recognized as an expense over the employee’s requisite serviceperiod (generally the vesting period of the equity award). Prior toJanuary 29, 2006, the Company accounted for share-based compensation toemployees in accordance with Accounting Principles Board Opinion No. 25, “Accountingfor Stock Issued to Employees” (APB No. 25), and related interpretations.The Company also followed the disclosure requirements of Statement of FinancialAccounting Standards No. 123, “Accounting for Stock-Based Compensation”.The Company adopted SFAS No. 123R using the modified prospective methodand, accordingly, financial statement amounts for prior periods presented inthis Form 10-Q have not been restated to reflect the fair value method ofrecognizing compensation cost relating to share-based compensation.

SFAS No. 123R alsorequires the Company to change the classification, in its consolidatedstatement of cash flows, of any tax benefits realized upon the exercise ofstock options or issuance of RSUs in excess of that which is associated withthe expense recognized for financial reporting purposes. These amounts,approximately $4,000 and $37,000 for the thirteen and thirty-nine weeks endedOctober 28, 2006, respectively, are presented as a financing cash inflow ratherthan as a reduction of 

7

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income taxes paid in theCompany’s consolidated statement of cash flows.

The Company recognizedapproximately $344,000 and $1,267,000 of compensation expense related to stockoptions, and approximately $549,000 and $1,344,000 of compensation expenserelated to RSUs, in its operating results (included in selling, general andadministrative expenses) in the thirteen and thirty-nine weeks ended October28, 2006, respectively. For the thirteen weeks ended October 28, 2006, theadoption of the fair value method of SFAS No. 123R resulted in additionalshare-based compensation expense and a corresponding reduction of pre-taxincome of approximately $344,000 and a reduction in net income of approximately$234,000. For the thirty-nine weeks ended October 28, 2006, the adoption of thefair value method of SFAS No. 123R resulted in additional share-basedcompensation expense and a corresponding reduction of pre-tax income ofapproximately $1,267,000, and a reduction in net income of approximately$888,000. The associated deferred tax benefit recognized was $184,000 and$66,000 in the thirteen and thirty-nine weeks ended October 28, 2006,respectively. Compensation expense for RSUs recognized before implementation ofSFAS No. 123R for the thirteen and thirty-nine weeks ended October 29, 2005was $598,000 and $2,001,000, respectively, and was included in selling, generaland administrative expenses. As of October 28, 2006 the cumulative effectresulting from the initial application of the provisions of SFAS No. 123Rto RSUs was approximately $183,000, net of tax.

The fair value of eachoption award is estimated on the date of grant using the Black-Scholesoption-pricing model. Expected volatility is based on historical volatilitiesfor a time period similar to that of the expected term. In estimating theexpected term of the options, the Company has utilized the “simplified method”allowable under SEC Staff Accounting Bulletin No. 107, *Share-Based Payment*. The risk-free rate isbased on the U.S. treasury yield curve for issues with a remaining term equalto the expected term.

The following table sets forth the assumptions used todetermine compensation cost for our stock options consistent with therequirements of SFAS No. 123R:

Under APB No. 25there was no compensation cost recognized for the Company’s stock optionsawarded in the thirteen and thirty-nine weeks ended October 29, 2005 as thesestock options had an exercise price equal to the market value of the underlyingstock at the grant date. The following table sets forth pro forma informationas if compensation cost had been determined consistent with the requirements ofSFAS No. 123:
| (dollar amounts in thousands, except share data)                            | ** ** | **Thirteen Weeks  EndedOctober 29, 2005** | ** ** | **Thirty-nine  Weeks Ended  October 29, 2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------------|------------|
|                                                                                                      |       |                                                     |       |                                                          |       |
| Net loss, as  reported                                                                                    |       | $                                                        | (11,196    | )                                                             | $          | (12,927 | ) |
|                                                                                                      |       |                                                     |       |                                                          |       |
| Add: Total  stock-based compensation for RSUs, net of tax                                                 |       | 395                                                      |       | 1,285                                                         |       |
| Deduct: Total  stock-based employee compensation cost determined under the fair value  method, net of tax |       | (877                                                     | )          | (2,646                                                        | )          |
|                                                                                                      |       |                                                     |       |                                                          |       |
| Pro forma net  loss                                                                                       |       | $                                                        | (11,678    | )                                                             | $          | (14,288 | ) |
|                                                                                                      |       |                                                     |       |                                                          |       |
| Loss per share:                                                                                           |       |                                                     |       |                                                          |       |
| Basic and diluted—as reported                                                                        |       | $                                                        | (0.20      | )                                                             | $          | (0.23 | ) |
| Basic and  diluted—pro forma                                                                         |       | $                                                        | (0.21      | )                                                             | $          | (0.26 | ) |

 

The following sets forthfair value per share information, including related assumptions, used todetermine compensation cost consistent with the requirements of SFASNo. 123:
|                                      | ** ** | **Thirty-nine Weeks  Ended  October 29, 2005** | ** ** |
|--------------------------------------|------------|---------------------------------------------------------------|------------|
|                                 |       |                                                          |       |
| Assumptions:                         |       |                                                          |       |
| Expected annual dividend yield       |       | 1.77                                                          | %          |
| Expected volatility                  |       | 46.0                                                          | %          |
| Risk-free interest rate range:       |       |                                                          |       |
| high                                 |       | 4.4                                                           | %          |
| low                                  |       | 3.5                                                           | %          |
| Ranges of expected  lives (in years) |       | 3-8                                                           |       |

 

8

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The following table summarizes information about stockoption activity for the thirty-nine weeks ended October 28, 2006:
|                                       | ** ** | **Number  of Options** | ** ** | **Weighted Average  Exercise Price** | ** ** | **Weighted Average  Remaining  Contractual  Term (years)** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|---------------------------------------|------------|-----------------------------|------------|------------------------------------------------|------------|----------------------------------------------------------------------|------------|-------------------------------------|------------|
|                                  |       |                        |       |                                           |       |                                                                 |       |                                |       |
| Outstanding at  January 28, 2006 |       | 4,537,155                   |       | $                                              | 15.87      |                                                                 | 4.7        |                                |       |   |
| Granted                               |       | 61,977                      |       | 15.01                                          |       |                                                                 |       |                                |       |
| Exercised                             |       | (32,550                     | )          | 7.43                                           |       |                                                                 |       |                                |       |
| Forfeited                             |       | (323,298                    | )          | 13.29                                          |       |                                                                 |       |                                |       |
| Expired                               |       | (1,040,702                  | )          | 13.11                                          |       |                                                                 |       |                                |       |
|                                  |       |                        |       |                                           |       |                                                                 |       |                                |       |
| Outstanding at  October 28, 2006      |       | 3,202,582                   |       | $                                              | 17.07      |                                                                 | 3.2        |                                | $          | 3,587,467 |   |
|                                  |       |                        |       |                                           |       |                                                                 |       |                                |       |
| Exercisable at October  28, 2006      |       | 2,925,820                   |       | $                                              | 17.18      |                                                                 | 2.9        |                                | $          | 3,377,117 |   |

 

The weighted average fairvalues of options granted during the thirteen and thirty-nine weeks endedOctober 28, 2006 and October 29, 2005 were $13.60 and $10.04, and $-0- and$7.66, respectively. The total intrinsic value of options (which is the amountby which the stock price exceeded the exercise price of the options on the dateof exercise) exercised during the thirteen and thirty-nine weeks ended October28, 2006 and October 29, 2005 was approximately $75,000 and $144,000, and$155,000 and $2,317,000, respectively. During the thirteen and thirty-nineweeks ended October 28, 2006, the amount of cash received from theexercise of stock options was $186,000 and $242,000, respectively, resulting intax benefits of $29,000 and $55,000, respectively.

At October 28, 2006,there was approximately $1,564,000 of total unrecognized pre-tax compensationcost related to non-vested stock options, which is expected to be recognizedover a weighted-average period of 2.45 years. The total fair values of stockoptions vested during the thirteen and thirty-nine weeks ended October 28, 2006and October 29, 2005 were approximately $426,000 and $2,401,000, and $363,000and $4,928,000, respectively.

The following tablesummarizes information about activity related to non-vested stock awards (RSUs)as of October 28, 2006 and changes for the thirty-nine weeks ended October 28,2006:
|                                      | ** ** | **Number  of RSUs** | ** ** | **Weighted Average  Grant Date  Fair Value** | ** ** |
|--------------------------------------|------------|--------------------------|------------|-------------------------------------------------------------|------------|
|                                 |       |                     |       |                                                        |       |
| Non-vested at  January 28, 2006 |       | 265,815                  |       | $                                                           | 18.41      |   |
| Granted                              |       | 221,161                  |       | 12.60                                                       |       |
| Vested                               |       | (77,800                  | )          | 18.25                                                       |       |
| Forfeited                            |       | (17,315                  | )          | 17.05                                                       |       |
| Non-vested at  October 28, 2006 |       | 391,861                  |       | 14.16                                                       |       |
|                                      |            |                          |            |                                                             |            |  |

 

At October 28, 2006,there was approximately $4,097,000 of total unrecognized pre-tax compensationcost related to non-vested RSUs, which is expected to be recognized over aweighted-average period of 1.7 years. The total fair values of RSUs vestedduring the thirteen and thirty-nine weeks ended October 28, 2006and October 29,2005 were approximately $59,000 and $1,420,000, and $63,000 and $792,000, respectively. The total intrinsicvalues of RSUs converted during the thirteen and thirty-nine weeks endedOctober 28, 2006 and October 29, 2005 were approximately  $-0- and $1,499,000, and $68,000 and $852,000,respectively. During the thirteen and thirty-nine weeks ended October 28, 2006,the tax benefits realized for converted RSUs were $-0- and $288,000,respectively. The grant date weighted average fair values for RSUs grantedduring the thirteen and thirty-nine weeks ended October 29, 2005 were $11.16and $14.92, respectively.

NOTE 4. Merchandise Inventories

Merchandise inventoriesare valued at the lower of cost or market. Cost is determined by using thelast-in, first-out (LIFO) method. An actual valuation of inventory under theLIFO method can be made only at the end of each fiscal year based on inventoryand costs 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 used bythe Company, inventory would have been $637,195,814 and $615,698,000 as ofOctober 28, 2006 and January 28, 2006, respectively.

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The Company alsoestablishes reserves for potentially excess and obsolete inventories based oncurrent inventory levels, the historical analysis of product sales and currentmarket conditions. The nature of the Company’s inventory is such that the riskof obsolescence is minimal and excess inventory has historically been returnedto the Company’s vendors for credit. The Company provides reserves when lessthan full credit is expected from a vendor or when market is lower thanrecorded costs. The reserves are revised, if necessary, on a quarterly basisfor adequacy. The Company’s reserves against inventory for these matters were$13,322,000 and $12,822,000 at October 28, 2006 and January 28, 2006,respectively.

NOTE 5. Other CurrentAssets

The Company’s othercurrent assets as of October 28, 2006 and January 28, 2006 were asfollows:
| (dollar amounts in thousands) | ** ** | **October 28, 2006** | ** ** | **Jan. 28, 2006** | ** ** |
|----------------------------------------------|------------|--------------------------------|------------|-----------------------------|------------|
|                                         |       |                           |       |                        |       |
| Reinsurance  receivable                      |       | $                              | 57,446     |                        | $          | 82,629 |   |
| Income taxes  receivable                     |       | 631                            |       | 2,694                       |       |
| Other                                        |       | 924                            |       | 123                         |       |
| Total                                        |       | $                              | 59,001     |                        | $          | 85,446 |   |

 

NOTE 6.Discontinued Operations

In accordance with SFASNo. 144, discontinued operations has reflected the ongoing costsassociated with eleven stores remaining on October 28, 2006 from 33 storesclosed on July 31, 2003 as part of a corporate restructuring.

Below is a summary ofthese stores’ operations for the thirteen and thirty-nine weeks ended October28, 2006 and October 29, 2005.
|                                                                | ** ** | **Thirteen Weeks Ended** | ** ** | **Thirty-nine Weeks Ended** | ** ** |
|----------------------------------------------------------------|------------|------------------------------------|------------|---------------------------------------|------------|
| **(dollar amounts in thousands)**               | ** ** | **October 28, 2006**     | ** ** | **October 29, 2005**        | ** ** | **October 28, 2006** | ** ** | **October 29, 2005** | ** ** |
| (Loss) gain from  discontinued operations, before income taxes |       | $                                  | (297       | )                                     | $          | 337 |   | $ | (496 | ) | $ | 4 |   |
|                                                                |            |                                    |            |                                       |            |  |  |  |  |  |  |  |  |

 

Additionally, the Companyhas classified certain assets as assets held for disposal on its balancesheets. As of October 28, 2006 and January 28, 2006 the net book values ofthese assets were as follows:
| (dollar amounts in thousands) | ** ** | **October 28, 2006** | ** ** | **January 28, 2006** | ** ** |
|----------------------------------------------|------------|--------------------------------|------------|--------------------------------|------------|
| Land                                         |       | $                              | —     |                           | $          | 120 |   |
| Buildings and  improvements                  |       | —                         |       | 532                            |       |
| Equipment                                    |       | —                         |       | —                         |       |
|                                         |       | $                              | —     |                           | $          | 652 |   |

 

Store Transfers

During the second quarterof fiscal 2006, the Company sold a store that it has leased back and willcontinue to operate for a one year period. Due to its significant continuinginvolvement with this store following the sale, the Company reclassified intocontinuing operations, for all periods presented, this store’s revenues andcosts that had been previously classified into discontinued operations duringthe third quarter of fiscal 2005, in accordance with SFAS No. 144 and EITFNo. 03-13.

During the first quarterof 2006, the Company reclassified a store, closed in October 2000, fromassets held for use to assets held for disposal in accordance with theprovisions of SFAS No. 144. The Company anticipates disposing of it withinone year.

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NOTE 7. Pension andSavings Plan

Pension expense includesthe following:
| ** **                                       | ** ** | **Thirteen Weeks Ended** | ** ** | **Thirty-nine Weeks Ended** | ** ** |
|--------------------------------------------------|------------|------------------------------------|------------|---------------------------------------|------------|
| **(dollar amounts in thousands)** | ** ** | **October 28, 2006**     | ** ** | **October 29, 2005**        | ** ** | **October 28, 2006** | ** ** | **October 29, 2005** | ** ** |
|                                             |       |                               |       |                                  |       |   |   |   |   |
| Service cost                                     |       | $                                  | 58         |                                  | $          | 91 |   | $ | 188 |   | $ | 273 |   |
| Interest cost                                    |       | 772                                |       | 753                                   |       | 2,300 |   | 2,259 |   |
| Expected return  on plan assets                  |       | (532                               | )          | (587                                  | )          | (1,645 | ) | (1,761 | ) |
| Amortization of  transition obligation           |       | 41                                 |       | 41                                    |       | 122 |   | 123 |   |
| Amortization of  prior service cost              |       | 91                                 |       | 91                                    |       | 269 |   | 273 |   |
| Amortization of  net loss                        |       | 602                                |       | 545                                   |       | 1,733 |   | 1,635 |   |
| Net periodic benefit  cost                       |       | $                                  | 1,032      |                                  | $          | 934 |   | $ | 2,967 |   | $ | 2,802 |   |

 

The Company originallyexpected to contribute approximately $1,417,000 to its pension plan in fiscal2006. As of October 28, 2006, $228,000 of such contributions had been made. TheCompany has revised its expectations during fiscal 2006 and now expects totalcontributions for fiscal 2006 to be approximately $515,000.

The Company has two401(k) savings plans, which cover all full-time employees who are at least21 years of age with one or more years of service. The Company contributes thelesser of 50% of the first 6% of a participant’s contributions or 3% of theparticipant’s compensation. The Company’s savings plans’ contribution expensewas approximately $359,000 and $544,000 for the thirteen weeks ended October28, 2006 and October 29, 2005, respectively, and $2,110,000 and $2,338,000 forthe thirty-nine weeks ended October 28, 2006 and October 29, 2005,respectively. On January 31, 2004, the Company amended and restated itsExecutive Supplemental Retirement Plan (SERP). This amendment converted thedefined benefit plan to a defined contribution plan for certain unvestedparticipants and all future participants. All vested participants continue toaccrue benefits according to the previous defined benefit formula. The Company’scontribution expense for the defined contribution portion of the plan wasapproximately $(9,000) and $12,000 for the thirteen weeks ended October 28,2006 and October 29, 2005, respectively, and $479,000 and $448,000 for thethirty-nine weeks ended October 28, 2006 and October 29, 2005, respectively.

NOTE 8.Advertising Expense

The Company expenses theproduction costs of advertising the first time the advertising takes place.Gross advertising expense was $18,611,000 and $18,561,000 for the thirteenweeks ended October 28, 2006 and October 29, 2005, respectively, and$62,706,000 and $65,588,000 for the thirty-nine weeks ended October 28, 2006and October 29, 2005, respectively. No advertising costs were recorded asassets as of October 28, 2006 or January 28, 2006.

Prior to the firstquarter of fiscal 2006, the Company received funds from vendors for cooperativeadvertising. Certain cooperative advertising reimbursements were nettedagainst specific, incremental, identifiable costs incurred in connection withthe selling of the vendor’s product. Cooperative advertising reimbursements of$7,510,000 and $26,929,000 for the thirteen and thirty-nine weeks ended October29, 2005, respectively, were recorded as a reduction of advertising expensewith the net amount included in selling, general and administrative expenses inthe consolidated statement of operations. Any excess reimbursements over thesecosts were characterized as a reduction of inventory and were recognized as areduction of cost of sales as the inventories were sold, in accordance withEITF No. 02-16. The amount of excess reimbursements recognized as areduction of costs of sales was $12,362,000 and $33,364,000 for the thirteenand the thirty-nine weeks ended October 29, 2005, respectively.

The Company hasrestructured substantially all of its vendor agreements, effectiveJanuary 29, 2006, to provide flexibility in how it can use vendor supportfunds, and eliminate the administrative burden associated with tracking theapplication of such funds. Accordingly, in the thirty-nine weeks ended October28, 2006, all vendor support funds were treated as a reduction of inventoriesand were recognized as a reduction to cost of sales as inventories were subsequentlysold.

NOTE 9. Debt andFinancing Arrangements

On October 27, 2006, the Companyamended and restated its Senior Secured Term Loan Facility dated January 27,2006.  The amendment increased the sizeof the facility from $200,000,000 to $320,000,000, extended its maturity fromJanuary 27, 2011 to October 27, 2013 and reduced its interest rate from LondonInterbank Offered Rate (LIBOR) plus 3.00% to LIBOR plus 2.75%.  The interest rate can be further reduced to LIBORplus 2.50% upon achieving a specified leverage ratio.  Accordingly, the number of the Company’sstores included in the collateral pool securing the facility increased from 154to 241.

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Proceeds from the facility were used tosatisfy and discharge the Company’s outstanding $119,000,000 4.25% ConvertibleSenior Notes due June 1, 2007 by deposit into an escrow fund with anindependent trustee. The right of the holders of the convertible notes toconvert them into shares of the Company’s common stock, at any time until theJune 1, 2007 maturity date, survives such satisfaction and discharge. Theconversion price is $22.40 per share. The Company recorded a non-cash charge for the value of such conversionright, approximately $755,000 as determined by the Black-Scholes method, in itsconsolidated statement of operations for the thirteen and thirty-nine weeksended October 28, 2006.

NOTE 10. Warranty Reserve

The Company provideswarranties for both its merchandise sales and service labor. Warranties formerchandise are generally covered by the respective vendors, with the Companycovering any costs above the vendor’s stipulated allowance. Service laborwarranties are covered in full by the Company on a limited lifetime basis. TheCompany establishes its warranty reserves based on historical data of warrantytransactions.

Components of the reservefor warranty costs for the thirty-nine week periods ending October 28, 2006 andOctober 29, 2005 are as follows:
| (dollar amounts in thousands) | ** ** | **Thirty-nine Weeks  Ended October 28,  2006** | ** ** | **Thirty-nine Weeks  Ended October 29,  2005** | ** ** |
|----------------------------------------------|------------|---------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                   | ** ** | ** **                                                    | ** ** | ** **                                                    | ** ** |
| Beginning  balance                           |       | $                                                             | 1,477      |                                                          | $          | 1,324 |   |
|                                         |       |                                                          |       |                                                          |       |
| Additions  related to current period sales   |       | 15,751                                                        |       | 16,056                                                        |       |
|                                         |       |                                                          |       |                                                          |       |
| Warranty costs  incurred in current period   |       | (15,824                                                       | )          | (15,795                                                       | )          |
| Ending balance                               |       | $                                                             | 1,404      |                                                          | $          | 1,585 |   |

 

NOTE 11. Net Earnings PerShare

At October 28, 2006 andOctober 29, 2005 there were 3,203,000 and 4,648,000 outstanding options topurchase shares of the Company’s common stock, respectively. Certain stockoptions were excluded from the calculation of diluted earnings per sharebecause their exercise prices were greater than the average market price of thecommon shares for the periods then ended. The total numbers of such sharesexcluded from the diluted earnings per share calculation are 2,757,000 and3,175,000 for the thirteen weeks ended October 28,2006 and October 29, 2005,respectively. The total numbers of such shares excluded from the dilutedearnings per share calculation are 2,895,000 and 3,218,000 for the thirty-nineweeks ended October 28, 2006 and October 29, 2005, respectively.

NOTE 12. SupplementalGuarantor Information

On December 14,2004, the Company issued $200,000,000 aggregate principal amount of 7.50%Senior Subordinated Notes due December 15, 2014, and on October 27,2006 the Company expanded its outstanding Senior Secured Term Loan facilityfrom $199,000,000 to $320,000,000 bearing interest of LIBOR plus 2.75% dueOctober 27, 2013. Both issuances are jointly and severally and fully andunconditionally guaranteed by the Company’s 100% owned direct and indirectoperating subsidiaries, The Pep Boys Manny, Moe & Jack of California,Pep Boys - Manny, Moe & Jack of Delaware, Inc. and Pep Boys -Manny, Moe & Jack of Puerto Rico, Inc. The Senior SubordinatedNotes are unsecured.

During the third quarterof fiscal 2006 certain assets have been sold at a price of $34,000,000 from PepBoys to the non-guarantor subsidiary.

The following areconsolidating balance sheets of the Company as of October 28, 2006 and January28, 2006 and the related consolidating statements of operations for thethirteen and thirty-nine weeks ended October 28, 2006 and October 29, 2005 andcondensed consolidating statements of cash flows for the thirty-nine weeksended October 28, 2006 and October 29, 2005.

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CONDENSED CONSOLIDATING BALANCE SHEET

(dollar amounts in thousands)

(unaudited)
| ** **                                                                    | ** ** | ** **        | ** ** | ** **     | ** ** | **Subsidiary** | ** ** | ** **         | ** ** | ** **       | ** ** |
|-------------------------------------------------------------------------------|------------|-------------------|------------|----------------|------------|----------------|------------|--------------------|------------|------------------|------------|
| ** **                                                                    | ** ** | ** **        | ** ** | **Subsidiary** | ** ** | **Non-**       | ** ** | **Consolidation/** | ** ** | ** **       | ** ** |
| **October 28, 2006**                                                | ** ** | **Pep Boys** | ** ** | **Guarantors** | ** ** | **Guarantors** | ** ** | **Elimination**    | ** ** | **Consolidated** | ** ** |
|                                                                          |       |              |       |           |       |           |       |               |       |             |       |
| ASSETS                                                                        |       |              |       |           |       |           |       |               |       |             |       |
| Current Assets:                                                               |       |              |       |           |       |           |       |               |       |             |       |
| Cash and cash  equivalents                                                    |       | $                 | 12,898     |           | $          | 7,794          |       | $                  | 1,800      |             | $          | — |   | $ | 22,492 |   |
| Accounts  receivable, net                                                     |       | 14,377            |       | 15,111         |       | —         |       | —             |       | 29,488           |       |
| Merchandise  inventories                                                      |       | 220,213           |       | 425,181        |       | —         |       | —             |       | 645,394          |       |
| Prepaid expenses                                                              |       | 21,266            |       | 8,921          |       | 3,488          |       | (8,524             | )          | 25,151           |       |
| Other                                                                         |       | (580              | )          | 2,252          |       | 56,964         |       | —             |       | 59,001           |       |
| Assets held for  disposal                                                     |       | —            |       | —         |       | —         |       | —             |       | —           |       |
| Total Current  Assets                                                         |       | 268,174           |       | 459,259        |       | 62,252         |       | (8,524             | )          | 781,527          |       |
| Property and Equipment  - at cost:                                            |       |              |       |           |       |           |       |               |       |             |       |
| Land                                                                          |       | 79,677            |       | 170,757        |       | 12,893         |       | (6,462             | )          | 256,865          |       |
| Buildings and  improvements                                                   |       | 307,552           |       | 601,693        |       | 20,937         |       | (10,638            | )          | 919,543          |       |
| Furniture,  fixtures and equipment                                            |       | 281,785           |       | 385,316        |       | —         |       | —             |       | 667,101          |       |
| Construction in  progress                                                     |       | 16,821            |       | 1,075          |       | —         |       | —             |       | 17,896           |       |
|                                                                          |       | 685,835           |       | 1,158,841      |       | 33,830         |       | (17,101            | )          | 1,861,405        |       |
| Less accumulated  depreciation and amortization                               |       | 378,226           |       | 571,172        |       | —         |       | 3,469              |       | 952,867          |       |
| Property and  Equipment - Net                                                 |       | 307,609           |       | 587,669        |       | 33,830         |       | (20,570            | )          | 908,538          |       |
|                                                                          |       |              |       |           |       |           |       |               |       |             |       |
| Investment in  subsidiaries                                                   |       | 1,594,339         |       | 1,387,577      |       | —         |       | (2,981,916         | )          | —           |       |
|                                                                          |       |              |       |           |       |           |       |               |       |             |       |
| Intercompany receivable                                                       |       | —            |       | 692,865        |       | 106,155        |       | (799,020           | )          | —           |       |
|                                                                          |       |              |       |           |       |           |       |               |       |             |       |
| Other                                                                         |       | 80,864            |       | (1,317         | )          | —         |       | —             |       | 79,547           |       |
| Total Assets                                                                  |       | $                 | 2,251,351  |           | $          | 3,126,053      |       | $                  | 202,237    |             | $          | (3,810,030 | ) | $ | 1,769,611 |   |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                    |       |              |       |           |       |           |       |               |       |             |       |
| Current Liabilities:                                                          |       |              |       |           |       |           |       |               |       |             |       |
| Accounts payable                                                              |       | $                 | 308,674    |           | $          | 9              |       | $                  | —     |             | $          | — |   | $ | 308,683 |   |
| Trade payable  program liability                                              |       | 13,284            |       | —         |       | —         |       | —             |       | 13,284           |       |
| Accrued expenses                                                              |       | 36,014            |       | 103,309        |       | 158,775        |       | (30,880            | )          | 267,218          |       |
| Deferred income  taxes                                                        |       | (50               | )          | 24,699         |       | (5,740         | )          | —             |       | 18,909           |       |
| Current  maturities of long-term debt and obligations under capital leases    |       | 2,686             |       | —         |       | —         |       | —             |       | 2,686            |       |
| Total Current  Liabilities                                                    |       | 360,608           |       | 128,017        |       | 153,035        |       | (30,880            | )          | 610,780          |       |
| Long-term debt  and obligations under capital leases, less current maturities |       | 520,411           |       | 4,015          |       | —         |       | —             |       | 524,426          |       |
| Convertible  long-term debt                                                   |       | —            |       | —         |       | —         |       | —             |       | —           |       |
| Other long-term  liabilities                                                  |       | 29,499            |       | 27,475         |       | —         |       | 1,788              |       | 58,762           |       |
| Intercompany  liabilities                                                     |       | 765,190           |       | —         |       | 33,830         |       | (799,020           | )          | —           |       |
| Stockholders’  Equity:                                                   |       |              |       |           |       |           |       |               |       |             |       |
| Common stock                                                                  |       | 68,557            |       | 1,502          |       | 100            |       | (1,602             | )          | 68,557           |       |
| Additional  paid-in capital                                                   |       | 289,718           |       | 436,858        |       | 3,900          |       | (440,758           | )          | 289,718          |       |
| Retained  earnings                                                            |       | 460,013           |       | 2,528,186      |       | 11,372         |       | (2,539,558         | )          | 460,013          |       |
| Accumulated  other comprehensive loss                                         |       | (4,209            | )          | —         |       | —         |       | —             |       | (4,209           | )          |
| Less:                                                                         |       |              |       |           |       |           |       |               |       |             |       |
| Cost of shares  in treasury                                                   |       | (179,172          | )          | —         |       | —         |       | —             |       | (179,172         | )          |
| Cost of shares  in benefits trust                                             |       | (59,264           | )          | —         |       | —         |       | —             |       | (59,264          | )          |
| Total  Stockholders’ Equity                                              |       | 575,643           |       | 2,966,546      |       | 15,372         |       | (2,981,918         | )          | 575,643          |       |
| Total Liabilities and  Stockholders’ Equity                              |       | $                 | 2,251,351  |           | $          | 3,126,053      |       | $                  | 202,237    |             | $          | (3,810,030 | ) | $ | 1,769,611 |   |

 

13

----

CONDENSED CONSOLIDATING BALANCE SHEET

(dollar amounts in thousands)

(unaudited)
| ** **                                                                    | ** ** | ** **        | ** ** | ** **     | ** ** | **Subsidiary** | ** ** | ** **         | ** ** | ** **       | ** ** |
|-------------------------------------------------------------------------------|------------|-------------------|------------|----------------|------------|----------------|------------|--------------------|------------|------------------|------------|
| ** **                                                                    | ** ** | ** **        | ** ** | **Subsidiary** | ** ** | **Non-**       | ** ** | **Consolidation/** | ** ** | ** **       | ** ** |
| **January 28, 2006**                                                | ** ** | **Pep Boys** | ** ** | **Guarantors** | ** ** | **Guarantors** | ** ** | **Elimination**    | ** ** | **Consolidated** | ** ** |
|                                                                          |       |              |       |           |       |           |       |               |       |             |       |
| ASSETS                                                                        |       |              |       |           |       |           |       |               |       |             |       |
| Current Assets:                                                               |       |              |       |           |       |           |       |               |       |             |       |
| Cash and cash equivalents                                                     |       | $                 | 12,019     |           | $          | 6,953          |       | $                  | 29,309     |             | $          | — |   | $ | 48,281 |   |
| Accounts receivable, net                                                      |       | 20,030            |       | 16,404         |       | —         |       | —             |       | 36,434           |       |
| Merchandise inventories                                                       |       | 209,384           |       | 406,908        |       | —         |       | —             |       | 616,292          |       |
| Prepaid expenses                                                              |       | 33,765            |       | 9,678          |       | 19,000         |       | (21,491            | )          | 40,952           |       |
| Other                                                                         |       | 6,116             |       | 8,960          |       | 70,370         |       | —             |       | 85,446           |       |
| Assets held for disposal                                                      |       | —            |       | 652            |       | —         |       | —             |       | 652              |       |
| Total Current Assets                                                          |       | 281,314           |       | 449,555        |       | 118,679        |       | (21,491            | )          | 828,057          |       |
| Property and  Equipment - at cost:                                            |       |              |       |           |       |           |       |               |       |             |       |
| Land                                                                          |       | 86,805            |       | 170,997        |       | —         |       | —             |       | 257,802          |       |
| Buildings and improvements                                                    |       | 316,725           |       | 599,855        |       | —         |       | —             |       | 916,580          |       |
| Furniture, fixtures and equipment                                             |       | 278,742           |       | 392,447        |       | —         |       | —             |       | 671,189          |       |
| Construction in progress                                                      |       | 15,261            |       | 597            |       | —         |       | —             |       | 15,858           |       |
|                                                                          |       | 697,533           |       | 1,163,896      |       | —         |       | —             |       | 1,861,429        |       |
| Less accumulated depreciation and amortization                                |       | 364,793           |       | 549,247        |       | —         |       | —             |       | 914,040          |       |
| Property and Equipment - Net                                                  |       | 332,740           |       | 614,649        |       | —         |       | —             |       | 947,389          |       |
| Investment in  subsidiaries                                                   |       | 1,520,208         |       | 1,290,063      |       | —         |       | (2,810,271         | )          | —           |       |
| Intercompany  receivable                                                      |       | —            |       | 631,061        |       | 84,563         |       | (715,624           | )          | —           |       |
| Other                                                                         |       | 42,144            |       | 3,723          |       | —         |       | 440                |       | 46,307           |       |
| Total Assets                                                                  |       | $                 | 2,176,406  |           | $          | 2,989,051      |       | $                  | 203,242    |             | $          | (3,546,946 | ) | $ | 1,821,753 |   |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                    |       |              |       |           |       |           |       |               |       |             |       |
| Current  Liabilities:                                                         |       |              |       |           |       |           |       |               |       |             |       |
| Accounts payable                                                              |       | $                 | 261,931    |           | $          | 9              |       | $                  | —     |             | $          | — |   | $ | 261,940 |   |
| Trade payable program liability                                               |       | 11,156            |       | —         |       | —         |       | —             |       | 11,156           |       |
| Accrued expenses                                                              |       | 45,410            |       | 90,428         |       | 195,472        |       | (40,549            | )          | 290,761          |       |
| Deferred income taxes                                                         |       | 64                |       | 21,690         |       | (6,337         | )          | —             |       | 15,417           |       |
| Current maturities of long-term debt and obligations  under capital leases    |       | 1,257             |       | —         |       | —         |       | —             |       | 1,257            |       |
| Total Current Liabilities                                                     |       | 319,818           |       | 112,127        |       | 189,135        |       | (40,549            | )          | 580,531          |       |
| Long-term debt  and obligations under capital leases, less current maturities |       | 423,572           |       | 43,667         |       | —         |       | —             |       | 467,239          |       |
| Convertible  long-term debt                                                   |       | 119,000           |       | —         |       | —         |       | —             |       | 119,000          |       |
| Other long-term  liabilities                                                  |       | 9,625             |       | 28,359         |       | —         |       | 19,497             |       | 57,481           |       |
| Intercompany  liabilities                                                     |       | 716,978           |       | (1,353         | )          | —         |       | (715,625           | )          | —           |       |
| Deferred income  taxes                                                        |       | (7,152            | )          | 10,089         |       | —         |       | —             |       | 2,937            |       |
| Stockholders’  Equity:                                                   |       |              |       |           |       |           |       |               |       |             |       |
| Common stock                                                                  |       | 68,557            |       | 1,502          |       | 100            |       | (1,602             | )          | 68,557           |       |
| Additional paid-in capital                                                    |       | 288,098           |       | 436,858        |       | 3,900          |       | (440,758           | )          | 288,098          |       |
| Retained earnings                                                             |       | 481,926           |       | 2,357,802      |       | 10,107         |       | (2,367,909         | )          | 481,926          |       |
| Accumulated other comprehensive loss                                          |       | (3,565            | )          | —         |       | —         |       | —             |       | (3,565           | )          |
| Less:                                                                         |       |              |       |           |       |           |       |               |       |             |       |
| Cost of shares in treasury                                                    |       | (181,187          | )          | —         |       | —         |       | —             |       | (181,187         | )          |
| Cost of shares in benefits trust                                              |       | (59,264           | )          | —         |       | —         |       | —             |       | (59,264          | )          |
| Total Stockholders’ Equity                                               |       | 594,565           |       | 2,796,162      |       | 14,107         |       | (2,810,269         | )          | 594,565          |       |
| Total Liabilities  and Stockholders’ Equity                              |       | $                 | 2,176,406  |           | $          | 2,989,051      |       | $                  | 203,242    |             | $          | (3,546,946 | ) | $ | 1,821,753 |   |

 

14

----

CONDENSED CONSOLIDATING STATEMENTS OFOPERATIONS

(dollar amounts in thousands)

(unaudited)
| **Thirteen weeks ended October 28, 2006**                                                       | ** ** | **Pep Boys** | ** ** | **Subsidiary  Guarantors** | ** ** | **Subsidiary  Non-  Guarantors** | ** ** | **Consolidation/  Elimination** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|----------------------------|------------|----------------------------------|------------|---------------------------------|------------|------------------|------------|
|                                                                                                                     |       |              |       |                       |       |                             |       |                            |       |             |       |
| Merchandise  Sales                                                                                                       |       | $                 | 156,507    |                       | $          | 297,204                          |       | $                               | —     |             | $          | — |   | $ | 453,711 |   |
| Service Revenue                                                                                                          |       | 33,748            |       | 63,390                     |       | —                           |       | —                          |       | 97,138           |       |
| Other Revenue                                                                                                            |       | —            |       | —                     |       | 6,705                            |       | (6,705                          | )          | —           |       |
| Total Revenues                                                                                                           |       | 190,255           |       | 360,594                    |       | 6,705                            |       | (6,705                          | )          | 550,849          |       |
| Costs of  Merchandise Sales                                                                                              |       | 110,308           |       | 212,717                    |       | —                           |       | —                          |       | 323,025          |       |
| Costs of Service  Revenue                                                                                                |       | 31,474            |       | 58,657                     |       | —                           |       | —                          |       | 90,131           |       |
| Costs of Other  Revenue                                                                                                  |       | —            |       | —                     |       | 8,191                            |       | (8,191                          | )          | —           |       |
| Total Costs of  Revenues                                                                                                 |       | 141,782           |       | 271,374                    |       | 8,191                            |       | (8,191                          | )          | 413,156          |       |
| Gross Profit  from Merchandise Sales                                                                                     |       | 46,199            |       | 84,487                     |       | —                           |       | —                          |       | 130,686          |       |
| Gross Profit  from Service Revenue                                                                                       |       | 2,274             |       | 4,733                      |       | —                           |       | —                          |       | 7,007            |       |
| Gross Loss from  Other Revenue                                                                                           |       | —            |       | —                     |       | (1,486                           | )          | 1,486                           |       | —           |       |
| Total Gross  Profit (Loss)                                                                                               |       | 48,473            |       | 89,220                     |       | (1,486                           | )          | 1,486                           |       | 137,693          |       |
| Selling, General  and Administrative Expenses                                                                            |       | 49,071            |       | 88,599                     |       | 99                               |       | 1,486                           |       | 139,255          |       |
| Net Gain From  Sale of Assets                                                                                            |       | 25                |       | 188                        |       | —                           |       | —                          |       | 213              |       |
| Operating Profit  (Loss)                                                                                                 |       | (573              | )          | 809                        |       | (1,585                           | )          | —                          |       | (1,349           | )          |
| Non-operating  (Expense) Income                                                                                          |       | (4,564            | )          | 11,638                     |       | 433                              |       | (6,490                          | )          | 1,017            |       |
| Interest Expense  (Income)                                                                                               |       | 30,167            |       | (6,772                     | )          | (1,324                           | )          | (6,490                          | )          | 15,581           |       |
| (Loss) Earnings  From Continuing Operations Before Income Taxes and Cumulative Effect of  Change in Accounting Principle |       | (35,304           | )          | 19,219                     |       | 172                              |       | —                          |       | (15,913          | )          |
| Income Tax  (Benefit) Expense                                                                                            |       | (3,623            | )          | (1,613                     | )          | 36                               |       | —                          |       | (5,200           | )          |
| Equity in  Earnings of Subsidiaries                                                                                      |       | 20,785            |       | 26,138                     |       | —                           |       | (46,923                         | )          | —           |       |
| Net (Loss)  Earnings From Continuing Operations Before Cumulative Effect of Change in  Accounting Principle              |       | (10,896           | )          | 46,970                     |       | 136                              |       | (46,923                         | )          | (10,713          | )          |
| Discontinued  Operations, Net of Tax                                                                                     |       | (22               | )          | (183                       | )          | —                           |       | —                          |       | (205             | )          |
| Cumulative  Effect of Change in Accounting principle, Net of Tax                                                         |       | 4                 |       | —                     |       | —                           |       | —                          |       | 4                |       |
| Net (Loss) Earnings                                                                                                      |       | $                 | (10,914    | )                          | $          | 46,787                           |       | $                               | 136        |             | $          | (46,923 | ) | $ | (10,914 | ) |

 

15

----

 
| **Thirteen weeks ended October 29, 2005** | ** ** | **Pep Boys** | ** ** | **Subsidiary  Guarantors** | ** ** | **Subsidiary  Non-  Guarantors** | ** ** | **Consolidation/  Elimination** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------|------------|-------------------|------------|----------------------------|------------|----------------------------------|------------|---------------------------------|------------|------------------|------------|
|                                                               |       |              |       |                       |       |                             |       |                            |       |             |       |
| Merchandise  Sales                                                 |       | $                 | 158,186    |                       | $          | 294,170                          |       | $                               | —     |             | $          | — |   | $ | 452,356 |   |
| Service Revenue                                                    |       | 31,817            |       | 61,731                     |       | —                           |       | —                          |       | 93,548           |       |
| Other Revenue                                                      |       | —            |       | —                     |       | 7,354                            |       | (7,354                          | )          | —           |       |
| Total Revenues                                                     |       | 190,003           |       | 378,791                    |       | 7,354                            |       | (7,354                          | )          | 545,904          |       |
| Costs of  Merchandise Sales                                        |       | 116,829           |       | 221,070                    |       | —                           |       | —                          |       | 337,899          |       |
| Costs of Service  Revenue                                          |       | 29,939            |       | 58,953                     |       | —                           |       | —                          |       | 88,892           |       |
| Costs of Other  Revenue                                            |       | —            |       | —                     |       | 7,135                            |       | (7,135                          | )          | —           |       |
| Total Costs of  Revenues                                           |       | 146,768           |       | 280,023                    |       | 7,135                            |       | (7,135                          | )          | 426,791          |       |
| Gross Profit  from Merchandise Sales                               |       | 41,357            |       | 73,100                     |       | —                           |       | —                          |       | 114,457          |       |
| Gross Profit  from Service Revenue                                 |       | 1,878             |       | 2,778                      |       | —                           |       | —                          |       | 4,656            |       |
| Gross Loss from  Other Revenue                                     |       | —            |       | —                     |       | 219                              |       | (219                            | )          | —           |       |
| Total Gross  Profit (Loss)                                         |       | 43,235            |       | 75,878                     |       | 219                              |       | (219                            | )          | 119,113          |       |
| Selling, General  and Administrative Expenses                      |       | 43,804            |       | 83,363                     |       | 89                               |       | (219                            | )          | 127,037          |       |
| Net Gain (Loss)  from Sales of Assets                              |       | 44                |       | (673                       | )          | —                           |       | —                          |       | (629             | )          |
| Operating (Loss)  Profit                                           |       | (525              | )          | (8,158                     | )          | 130                              |       | —                          |       | (8,553           | )          |
| Non-operating  (Expense) Income                                    |       | (4,544            | )          | 23,067                     |       | 166                              |       | (18,163                         | )          | 526              |       |
| Interest Expense  (Income)                                         |       | 18,849            |       | 9,547                      |       | (1,028                           | )          | (18,163                         | )          | 9,205            |       |
| (Loss) Earnings  From Continuing Operations Before Income Taxes    |       | (23,918           | )          | 5,362                      |       | 1,324                            |       | —                          |       | (17,232          | )          |
| Income Tax  (Benefit) Expense                                      |       | (10,776           | )          | 4,464                      |       | 456                              |       | —                          |       | (5,856           | )          |
| Equity in  Earnings of Subsidiaries                                |       | 2,346             |       | 8,182                      |       | —                           |       | (10,528                         | )          | —           |       |
| Net (Loss)  Earnings From Continuing Operations                    |       | (10,796           | )          | 9,080                      |       | 868                              |       | (10,528                         | )          | (11,376          | )          |
| Discontinued  Operations, Net of Tax                               |       | 206               |       | (26                        | )          | —                           |       | —                          |       | 180              |       |
| Cumulative  Effect of Change in Accounting Principle, Net of Tax   |       | —            |       | —                     |       | —                           |       | —                          |       | —           |       |
|                                                               |       |              |       |                       |       |                             |       |                            |       |             |       |
| Net (Loss) Earnings                                                |       | $                 | (10,590    | )                          | $          | 9,054                            |       | $                               | 868        |             | $          | (10,528 | ) | $ | (11,196 | ) |

 

16

----

CONDENSED CONSOLIDATING STATEMENTS OFOPERATIONS

(dollar amounts in thousands)

(unaudited)
| **Thirty-nine weeks ended October 28, 2006**                                                    | ** ** | **Pep Boys** | ** ** | **Subsidiary  Guarantors** | ** ** | **Subsidiary  Non-  Guarantors** | ** ** | **Consolidation/  Elimination** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|----------------------------|------------|----------------------------------|------------|---------------------------------|------------|------------------|------------|
|                                                                                                                     |       |              |       |                       |       |                             |       |                            |       |             |       |
| Merchandise  Sales                                                                                                       |       | $                 | 484,535    |                       | $          | 908,488                          |       | $                               | —     |             | $          | — |   | $ | 1,393,023 |   |
| Service Revenue                                                                                                          |       | 102,020           |       | 190,972                    |       | —                           |       | —                          |       | 292,992          |       |
| Other Revenue                                                                                                            |       | —            |       | —                     |       | 20,845                           |       | (20,845                         | )          | —           |       |
| Total Revenues                                                                                                           |       | 586,555           |       | 1,099,460                  |       | 20,845                           |       | (20,845                         | )          | 1,686,015        |       |
| Costs of  Merchandise Sales                                                                                              |       | 343,075           |       | 652,372                    |       | —                           |       | —                          |       | 995,447          |       |
| Costs of Service  Revenue                                                                                                |       | 94,210            |       | 174,685                    |       | —                           |       | —                          |       | 268,895          |       |
| Costs of Other  Revenue                                                                                                  |       | —            |       | —                     |       | 24,155                           |       | (24,155                         | )          | —           |       |
| Total Costs of  Revenues                                                                                                 |       | 437,285           |       | 827,057                    |       | 24,155                           |       | (24,155                         | )          | 1,264,342        |       |
| Gross Profit  from Merchandise Sales                                                                                     |       | 141,460           |       | 256,116                    |       | —                           |       | —                          |       | 397,576          |       |
| Gross Profit  from Service Revenue                                                                                       |       | 7,810             |       | 16,287                     |       | —                           |       | —                          |       | 24,097           |       |
| Gross Loss from  Other Revenue                                                                                           |       | —            |       | —                     |       | (3,310                           | )          | 3,310                           |       | —           |       |
| Total Gross  Profit (Loss)                                                                                               |       | 149,270           |       | 272,403                    |       | (3,310                           | )          | 3,310                           |       | 421,673          |       |
| Selling, General  and Administrative Expenses                                                                            |       | 141,472           |       | 264,977                    |       | 261                              |       | 3,310                           |       | 410,020          |       |
| Net Gain From  Sale of Assets                                                                                            |       | 9                 |       | 6,220                      |       | —                           |       | —                          |       | 6,229            |       |
| Operating Profit  (Loss)                                                                                                 |       | 7,807             |       | 13,646                     |       | (3,571                           | )          | —                          |       | 17,882           |       |
| Non-operating  (Expense) Income                                                                                          |       | (14,026           | )          | 69,033                     |       | 1,158                            |       | (50,871                         | )          | 5,294            |       |
| Interest Expense  (Income)                                                                                               |       | 83,685            |       | 8,853                      |       | (3,781                           | )          | (50,871                         | )          | 37,886           |       |
| (Loss) Earnings  From Continuing Operations Before Income Taxes and Cumulative Effect of  Change in Accounting Principle |       | (89,904           | )          | 73,826                     |       | 1,368                            |       | —                          |       | (14,710          | )          |
| Income Tax  (Benefit) Expense                                                                                            |       | (4,249            | )          | (454                       | )          | 103                              |       | —                          |       | (4,600           | )          |
| Equity in  Earnings of Subsidiaries                                                                                      |       | 75,245            |       | 96,404                     |       | —                           |       | (171,649                        | )          | —           |       |
| Net (Loss)  Earnings From Continuing Operations Before Cumulative Effect of Change in  Accounting Principle              |       | (10,410           | )          | 170,684                    |       | 1,265                            |       | (171,649                        | )          | (10,110          | )          |
| Discontinued  Operations, Net of Tax                                                                                     |       | (38               | )          | (300                       | )          | —                           |       | —                          |       | (338             | )          |
| Cumulative  Effect of Change in Accounting Principle, Net of Tax                                                         |       | 183               |       | —                     |       | —                           |       | —                          |       | 183              |       |
| Net (Loss) Earnings                                                                                                      |       | $                 | (10,265    | )                          | $          | 170,384                          |       | $                               | 1,265      |             | $          | (171,649 | ) | $ | (10,265 | ) |

 

17

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| **Thirty-nine weeks ended October 29, 2005** | ** ** | **Pep Boys** | ** ** | **Subsidiary  Guarantors** | ** ** | **Subsidiary  Non-  Guarantors** | ** ** | **Consolidation/  Elimination** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------------------------------|------------|-------------------|------------|----------------------------|------------|----------------------------------|------------|---------------------------------|------------|------------------|------------|
|                                                                  |       |              |       |                       |       |                             |       |                            |       |             |       |
| Merchandise  Sales                                                    |       | $                 | 481,435    |                       | $          | 915,377                          |       | $                               | —     |             | $          | — |   | $ | 1,396,812 |   |
| Service Revenue                                                       |       | 99,803            |       | 190,933                    |       | —                           |       | —                          |       | 290,736          |       |
| Other Revenue                                                         |       | —            |       | —                     |       | 22,229                           |       | (22,229                         | )          | —           |       |
| Total Revenues                                                        |       | 581,238           |       | 1,106,310                  |       | 22,229                           |       | (22,229                         | )          | 1,687,548        |       |
| Costs of  Merchandise Sales                                           |       | 360,090           |       | 671,023                    |       | —                           |       | —                          |       | 1,031,113        |       |
| Costs of Service  Revenue                                             |       | 88,489            |       | 171,091                    |       | —                           |       | —                          |       | 259,580          |       |
| Costs of Other  Revenue                                               |       | —            |       | —                     |       | 25,404                           |       | (25,404                         | )          | —           |       |
| Total Costs of  Revenues                                              |       | 448,579           |       | 842,114                    |       | 25,404                           |       | (25,404                         | )          | 1,290,693        |       |
| Gross Profit  from Merchandise Sales                                  |       | 120,345           |       | 245,354                    |       | —                           |       | —                          |       | 365,699          |       |
| Gross Profit  from Service Revenue                                    |       | 11,314            |       | 19,842                     |       | —                           |       | —                          |       | 31,156           |       |
| Gross Loss from  Other Revenue                                        |       | —            |       | —                     |       | (3,175                           | )          | 3,175                           |       | —           |       |
| Total Gross  Profit (Loss)                                            |       | 132,659           |       | 264,196                    |       | (3,175                           | )          | 3,175                           |       | 396,855          |       |
| Selling, General  and Administrative Expenses                         |       | 135,501           |       | 256,443                    |       | 248                              |       | 3,175                           |       | 395,367          |       |
| Net (Loss) Gain  from Sales of Assets                                 |       | (567              | )          | 3,544                      |       | —                           |       | —                          |       | 2,977            |       |
| Operating (Loss)  Profit                                              |       | (3,409            | )          | 11,297                     |       | (3,423                           | )          | —                          |       | 4,465            |       |
| Non-operating  (Expense) Income                                       |       | (12,516           | )          | 65,100                     |       | 340                              |       | (50,177                         | )          | 2,747            |       |
| Interest Expense  (Income)                                            |       | 57,089            |       | 23,208                     |       | (2,766                           | )          | (50,177                         | )          | 27,354           |       |
| (Loss) Earnings  From Continuing Operations Before Income Taxes       |       | (73,014           | )          | 53,189                     |       | (317                             | )          | —                          |       | (20,142          | )          |
| Income Tax  (Benefit) Expense                                         |       | (29,029           | )          | 22,107                     |       | (290                             | )          | —                          |       | (7,212           | )          |
| Equity in  Earnings of Subsidiaries                                   |       | 31,333            |       | 43,707                     |       | —                           |       | (75,040                         | )          | —           |       |
| Net (Loss)  Earnings From Continuing Operations                       |       | (12,652           | )          | 74,789                     |       | (27                              | )          | (75,040                         | )          | (12,930          | )          |
|                                                                  |       |              |       |                       |       |                             |       |                            |       |             |       |
| Discontinued  Operations, Net of Tax                                  |       | 331               |       | (328                       | )          | —                           |       | —                          |       | 3                |       |
| Net (Loss) Earnings                                                   |       | $                 | (12,321    | )                          | $          | 74,461                           |       | $                               | (27        | )                | $          | (75,040 | ) | $ | (12,927 | ) |

 

18

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CONDENSED CONSOLIDATING STATEMENTS OF CASHFLOWS

(dollar amount in thousands)

(unaudited)
| **Thirty-nine weeks ended October 28, 2006**                                 | ** ** | **Pep Boys** | ** ** | **Subsidiary  Guarantors** | ** ** | **Subsidiary  Non-  Guarantors** | ** ** | **Consolidation/  Elimination** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|-------------------|------------|----------------------------|------------|----------------------------------|------------|---------------------------------|------------|------------------|------------|
|                                                                                                  |       |              |       |                       |       |                             |       |                            |       |             |       |
| Cash Flows from  Operating Activities:                                                                |       |              |       |                       |       |                             |       |                            |       |             |       |
| Net (loss) earnings                                                                                   |       | $                 | (10,265    | )                          | $          | 170,384                          |       | $                               | 1,265      |             | $          | (171,649 | ) | $ | (10,265 | ) |
| Adjustments to Reconcile Net (Loss) Earnings to Net  Cash (Used in) Provided by Continuing Operations |       | (56,311           | )          | (65,396                    | )          | 597                              |       | 171,649                         |       | 50,539           |       |
| Change in operating assets and liabilities                                                            |       | 50,091            |       | 1,762                      |       | (7,779                           | )          | —                          |       | 44,074           |       |
| Net cash (used in) provided by continuing operations                                                  |       | (16,485           | )          | 106,750                    |       | (5,917                           | )          | —                          |       | 84,348           |       |
| Net cash used in discontinued operations                                                              |       | (58               | )          | (309                       | )          | —                           |       | —                          |       | (367             | )          |
| Net Cash (Used in) Provided by Operating Activities                                                   |       | (16,543           | )          | 106,441                    |       | (5,917                           | )          | —                          |       | 83,981           |       |
| Net Cash Used in Investing Activities                                                                 |       | (2,083            | )          | (5,269                     | )          | (33,830                          | )          | —                          |       | (41,182          | )          |
| Net Cash Provided by (Used in) Financing Activities                                                   |       | 19,505            |       | (100,331                   | )          | 12,238                           |       | —                          |       | (68,588          | )          |
| Net Increase  (Decrease) in Cash                                                                      |       | 879               |       | 841                        |       | (27,509                          | )          | —                          |       | (25,789          | )          |
| Cash and Cash  Equivalents at Beginning of Period                                                     |       | 12,019            |       | 6,953                      |       | 29,309                           |       | —                          |       | 48,281           |       |
| Cash and Cash  Equivalents at End of Period                                                           |       | $                 | 12,898     |                       | $          | 7,794                            |       | $                               | 1,800      |             | $          | — |   | $ | 22,492 |   |

 

19

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| **Thirty-nine weeks ended October 29, 2005**                                                               | ** ** | **Pep Boys** | ** ** | **Subsidiary  Guarantors** | ** ** | **Subsidiary  Non-  Guarantors** | ** ** | **Consolidation/  Elimination** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|----------------------------|------------|----------------------------------|------------|---------------------------------|------------|------------------|------------|
| ** **                                                                                                                          | ** ** | ** **        | ** ** | ** **                 | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** **       | ** ** |
| Cash Flows from  Operating Activities:                                                                                              |       |              |       |                       |       |                             |       |                            |       |             |       |
| Net (loss) earnings                                                                                                                 |       | $                 | (12,321    | )                          | $          | 74,461                           |       | $                               | (27        | )                | $          | (75,040 | ) | $ | (12,927 | ) |
| Adjustments to Reconcile Net (Loss) Earnings from  Continuing Operations to Net Cash Provided by (Used In) discontinued  Operations |       | 88,911            |       | (120,905                   | )          | 430                              |       | 75,040                          |       | 43,476           |       |
| Change in operating assets and liabilities                                                                                          |       | (26,207           | )          | 689                        |       | (4,319                           | )          | —                          |       | (29,837          | )          |
| Net cash provided by (used in) continuing operations                                                                                |       | 50,383            |       | (45,755                    | )          | (3,916                           | )          | —                          |       | 712              |       |
| Net cash (used in) provided by discontinued  operations                                                                             |       | (1,371            | )          | 1,112                      |       | —                           |       | —                          |       | (259             | )          |
| Net Cash Provided by (Used in) Operating Activities                                                                                 |       | 49,012            |       | (44,643                    | )          | (3,916                           | )          | —                          |       | 453              |       |
| Cash Flows from  Investing Activities:                                                                                              |       |              |       |                       |       |                             |       |                            |       |             |       |
| Net Cash Used in Continuing Operations                                                                                              |       | (18,070           | )          | (38,978                    | )          | —                           |       | —                          |       | (57,048          | )          |
| Net Cash Provided by discontinued operations                                                                                        |       | 916               |       | —                     |       | —                           |       | —                          |       | 916              |       |
| Net Cash Used in Investing Activities                                                                                               |       | (17,154           | )          | (38,978                    | )          | —                           |       | —                          |       | (56,132          | )          |
| Net Cash (Used in) Provided by Financing Activities                                                                                 |       | (78,053           | )          | 83,048                     |       | 4,460                            |       | —                          |       | 9,455            |       |
| Net (Decrease)  Increase in Cash                                                                                                    |       | (46,195           | )          | (573                       | )          | 544                              |       | —                          |       | (46,224          | )          |
| Cash and Cash  Equivalents at Beginning of Period                                                                                   |       | 59,032            |       | 8,474                      |       | 15,252                           |       | —                          |       | 82,758           |       |
| Cash and Cash  Equivalents at End of Period                                                                                         |       | $                 | 12,837     |                       | $          | 7,901                            |       | $                               | 15,796     |             | $          | — |   | $ | 36,534 |   |

 

20

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NOTE 13.Contingencies

The Company is not currently engaged inany litigation arising outside the ordinary course of its business that itbelieves to be material. The Company is party to various actions and claims,including purported class actions, arising in the normal course of business.The Company believes that amounts accrued for awards or assessments inconnection with such matters are adequate and that the ultimate resolution ofthese matters will not have a material adverse effect on the Company’s financialposition or results of operations.

NOTE 14.Comprehensive Loss

The followingare the components of comprehensive loss:
| ** **                                      | ** ** | **Thirteen Weeks Ended** | ** ** | **Thirty-nine Weeks Ended** | ** ** |
|-------------------------------------------------|------------|------------------------------------|------------|---------------------------------------|------------|
| **(Amounts in thousands)**            | ** ** | **October 28,  2006**         | ** ** | **October 29,  2005**            | ** ** | **October 28,  2006** | ** ** | **October 29,  2005** | ** ** |
|                                            |       |                               |       |                                  |       |   |   |   |   |
| Net loss                                        |       | $                                  | (10,914    | )                                     | $          | (11,196 | ) | $ | (10,265 | ) | $ | (12,927 | ) |
|                                            |       |                               |       |                                  |       |   |   |   |   |
| Other comprehensive  income (loss), net of tax: |       |                               |       |                                  |       |   |   |   |   |
|                                            |       |                               |       |                                  |       |   |   |   |   |
| Minimum pension  liability adjustments          |       | —                             |       | —                                |       | — |   | 345 |   |
|                                            |       |                               |       |                                  |       |   |   |   |   |
| Derivative  financial instrument adjustments    |       | (768                               | )          | 520                                   |       | (644 | ) | 1,503 |   |
|                                            |       |                               |       |                                  |       |   |   |   |   |
| Comprehensive loss                              |       | $                                  | (11,682    | )                                     | $          | (10,676 | ) | $ | (10,909 | ) | $ | (11,079 | ) |

 

The componentsof accumulated other comprehensive loss are:
|                                                         | ** ** | **October 28,  2006** | ** ** | **January 28,  2006** | ** ** |
|---------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
|                                                    |       |                       |       |                       |       |
| Derivative  financial instrument adjustment, net of tax |       | $                          | 3,016      |                       | $          | 3,660 |   |
| Minimum pension  liability adjustment, net of tax       |       | (7,225                     | )          | (7,225                     | )          |
|                                                    |       | $                          | (4,209     | )                          | $          | (3,565 | ) |

 

NOTE 15. Subsequent Event

 On November 21, 2006, the Company reached asettlement, subject to court approval, of three pending actions involvingvarious wage and hour claims under the Federal Fair Labor Standards Act andCalifornia state law for an aggregate amount of $4,550,000.  The Company’s condensed consolidatedfinancial statements included in this Quarterly Report on Form 10Q have beenadjusted  to include thissettlement.  The charge is recordedwithin SG&A expenses for the thirteen and thirty-nine weeks ended October28, 2006.

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Item2.    Management’sDiscussion and Analysis of Financial Condition and Results of Operations

The discussionand analysis below for the Company should be read in conjunction with (i) thefinancial statements and the notes to such financial statements includedelsewhere in this Form 10-Q and (ii) the 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 year endedJanuary 28, 2006.

OVERVIEW

The Pep Boys -Manny, Moe & Jack is a leader in the automotive aftermarket with 593 storeslocated throughout 36 states and Puerto Rico. All of our stores feature thenationally recognized Pep Boys brand name, established through more than 80years of providing high-quality automotive merchandise and services, and arecompany-owned, ensuring chain-wide consistency for our customers. We are theonly national chain offering automotive service, accessories, tires and partsunder one roof, positioning us to achieve our goal of becoming the category dominantone-stop shop for automotive maintenance products and services.

For the thirteenweeks ended October 28, 2006, our comparable sales (salesgenerated by locations in operation during the same period) increasedby 0.8%, compared to a decrease of 2.0% for the thirteen weeks ended October29, 2005.  The increase resulted fromstronger core merchandise sales (e.g. hard parts, oil and chemicals) over theprior period, and a 3.9% increase in labor revenue, offset by weaker sales ofgenerators, which were sold at heightened levels in the third quarter of 2005due to the active hurricane season.

During the thirdquarter of fiscal 2006, we continued to reinvest in our stores to redesigntheir interiors and enhance their exterior appeal. During the thirteen weeksended October 28, 2006, we grand reopened an additional 13 stores in Florida,following the grand reopening of approximately 66 stores in New York, Floridaand Colorado in the twenty-six weeks ended July 29, 2006. Approximately 25additional stores are expected to be remodeled and grand reopened during theremainder of fiscal 2006. In fiscal 2007, we expect to remodel and grand reopenapproximately 125-150 stores, with the balance of approximately 140-160 storesto be completed in fiscal 2008 and 2009.

The followingdiscussion explains the material changes in our results of operations for thethirteen and thirty-nine weeks ended October 28, 2006 and the significantdevelopments affecting our financial condition since January 28, 2006. We stronglyrecommend that you read the audited financial statements and footnotes andManagement’s Discussion and Analysis of Financial Condition and Results ofOperations included in our Annual Report on Form 10-K for the fiscal year endedJanuary 28, 2006.

LIQUIDITYAND CAPITAL RESOURCES - October 28, 2006

Our cash requirements arise principallyfrom capital expenditures related to existing stores, offices and warehousesand from the purchase of inventory. While the primary capital expenditures forthe thirty-nine weeks ended October 28, 2006 continue to be attributed tostore redesigns, the rate of our store refurbishment program was decreasedsignificantly both as a result of our decision in the second quarter to extendit through fiscal 2009 as well as its increased cost-effectiveness. During thethirty-nine weeks ended October 28, 2006, we invested approximately $25,000,000in property and equipment, a reduction of approximately 60% from the firstthree quarters of fiscal 2005. We estimate that capital expenditures related toexisting stores, warehouses and offices during the remainder of fiscal 2006will be less than $25,000,000, related primarily to the redesign of ourexisting stores.

We anticipatethat our net cash provided by operating activities and our existing revolvingcredit facility will exceed our principal cash requirements for capitalexpenditures and inventory purchases for the remainder of fiscal 2006 andfiscal 2007.

On October 27, 2006, we amended andrestated our Senior Secured Term Loan Facility dated January 27, 2006.  The amendment increased the size of thefacility from $200,000,000 to $320,000,000, extended its maturity from January27, 2011 to October 27, 2013 and reduced its interest rate from LondonInterbank Offered Rate (LIBOR) plus 3.00% to LIBOR plus 2.75%.  The interest rate can be further reduced toLIBOR plus 2.50% upon achieving a specified leverage ratio.  Accordingly, the number of our storesincluded in the collateral pool securing the facility increased from 154 to241.

Proceeds from the facility were used tosatisfy and discharge our outstanding $119,000,000 4.25% Convertible SeniorNotes due June 1, 2007 by deposit into an escrow fund with an independenttrustee. The right of the holders of the convertible notes to convert them intoshares of our common stock, at any time until the June 1, 2007 maturitydate, survives such satisfaction and discharge. The conversion price is $22.40per share.  We recorded a non-cash chargefor the value of such conversion 

22

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right, approximately $755,000 asdetermined by the Black-Scholes method, in our consolidated statement ofoperations for the thirteen and thirty-nine weeks ended October 28, 2006.

During the thirteen weeks ended October28, 2006 we repaid approximately $25,000,000 of life insurance proceeds, whichhad been withdrawn against the cash surrender value of our life insurancepolicies during fiscal 2005.

Working capitaldecreased from $247,526,000 at January 28, 2006 to $170,746,000 at October 28,2006, primarily due to repayments of our long term line of credit and adecrease in reinsurance receivable. At October 28, 2006, we had stockholders’equity of $575,643,000 and long-term debt, net of current maturities, of$524,426,000. Our long-term debt was 47.7% of our total capitalization atOctober 28, 2006 and 49.6% at January 28, 2006. As of October 28, 2006, we hadan available line of credit totaling $218,968,000 and a cash and cashequivalents balance of $22,492,000.

As a convenienceto our vendors, we provide a vendor financing program with an availability of$20,000,000. Under this program, the Company’s factor makes accelerated anddiscounted payments to our vendors and the Company, in turn, makes itsregularly scheduled full vendor payments to the factor. As of October 28, 2006,the Company had an outstanding balance of $13,284,000 under these arrangements,classified as trade payable program liability in the consolidated balancesheet.

CONTRACTUALOBLIGATIONS

The followingcharts represent the Company’s total contractual obligations and commercialcommitments as of October 28, 2006:
| (dollar amounts in thousands)  Obligation    | ** ** | **Total** | ** ** | **Due in less  than 1 year** | ** ** | **Due in  1-3 years** | ** ** | **Due in  3-5 years** | ** ** | **Due After  5 years** | ** ** |
|-------------------------------------------------------------|------------|-----------|------------|--------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|----------------------------------|------------|
| Long-term debt                                              |       | $         | 526,367    |                                             | $          | 2,419                           |       | $                               | 6,443      |                             | $          | 12,546 |   | $ | 504,959 |   |
| Operating leases                                            |       | 595,111   |       | 66,586                                           |       | 239,883                         |       | 82,344                          |       | 206,298                          |       |
| Expected scheduled  interest payments on all long-term debt |       | 305,125   |       | 37,055                                           |       | 81,669                          |       | 80,510                          |       | 105,891                          |       |
| Capital leases                                              |       | 745       |       | 222                                              |       | 523                             |       | —                          |       | —                           |       |
| Unconditional purchase  obligation                          |       | 4,320     |       | 945                                              |       | 1,890                           |       | 1,485                           |       | —                           |       |
| Total cash obligations                                      |       | $         | 1,431,668  |                                             | $          | 107,227                         |       | $                               | 330,408    |                             | $          | 176,885 |   | $ | 817,148 |   |

 

The tableexcludes our pension obligation. Future plan contributions are dependent uponactual plan asset returns and interest rates. We originally expected tocontribute approximately $1,417,000 to our pension plan in fiscal 2006. As ofOctober 28, 2006, $228,000 of contributions had been made. We now anticipatetotal pension contributions for fiscal 2006 to be approximately $515,000.
| (dollar amounts in thousands)  Commercial Commitments | ** ** | **Total** | ** ** | **Due in less  than 1 year** | ** ** | **Due in  1-3 years** | ** ** | **Due in  3-5 years** | ** ** | **Due After  5 years** | ** ** |
|---------------------------------------------------------------------------|------------|-----------|------------|--------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|----------------------------------|------------|
| Import letters  of credit                                                 |       | $         | 327        |                                             | $          | 327                             |       | $                               | —     |                             | $          | — |   | $ | — |   |
| Standby letters  of credit                                                |       | 55,708    |       | 55,708                                           |       | —                          |       | —                          |       | —                           |       |
| Surety bonds                                                              |       | 11,454    |       | 11,246                                           |       | 208                             |       | —                          |       | —                           |       |
| Total commercial  commitments                                             |       | $         | 67,489     |                                             | $          | 67,281                          |       | $                               | 208        |                             | $          | — |   | $ | — |   |

 

OTHERCONTRACTUAL OBLIGATIONS

In the firstquarter of fiscal 2005, we entered into a contractual commitment to purchaseapproximately $4,800,000 of products over a six-year period. The commitment foryears two through five is approximately $945,000 per year, while the first andfinal year’s commitment is approximately $500,000. Following year two, we areobligated to pay the vendor a per unit reimbursement for any shortfall betweenour cumulative purchases during the two year period then ended and the minimumpurchase requirement. For years three through six, we are obligated to pay thevendor a per unit reimbursement for any annual shortfall. The maximumobligation under any shortfall is approximately $945,000. At October 28, 2006,we expect to satisfy each of the cumulative minimum purchase requirements underthis contract.

DISCONTINUEDOPERATIONS

In accordancewith SFAS No. 144, our discontinued operations has reflected the ongoingcosts associated with eleven stores remaining from the 33 stores closed onJuly 31, 2003 as part of our corporate restructuring (see Note 6 ofItem 1—Notes to Condensed Consolidated Financial Statements).

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Store Transfers

Duringthe second quarter of fiscal 2006, we sold a store that we have leased back andwill continue to operate for a one year period. Due to our significantcontinuing involvement with this store following the sale, we reclassified backinto continuing operations, for all periods presented, this store’s revenuesand costs that had been previously reclassified into discontinued operationsduring the third quarter of fiscal 2005, in accordance with SFAS No. 144and EITF 03-13.

RESULTSOF OPERATIONS

The followingtable presents for the periods indicated certain items in the consolidatedstatements of operations as a percentage of total revenues (except as otherwiseprovided) and the percentage change in dollar amounts of such items compared tothe indicated prior period.
| ** **                                                                                                    | ** ** | **Percentage of Total Revenues** | ** ** | **Percentage  Change**                             | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|----------------------------------------------------|------------|
| **Thirteen weeks ended**                                                                            | ** ** | **October 28,  2006  (Fiscal 2006)**  | ** ** | **October 29, 2005  (Fiscal 2005)** | ** ** | **Favorable  (Unfavorable)** | ** ** |
| ** **                                                                                                    | ** ** | ** **                                      | ** ** | ** **                                         | ** ** | ** ** | ** ** |
| Merchandise Sales                                                                                             |       | 82.4                                            | %          | 82.9                                               | %          | 0.3 | % |
| Service Revenue (1)                                                                                           |       | 17.6                                            |       | 17.1                                               |       | 3.8 |   |
| Total Revenues                                                                                                |       | 100.0                                           |       | 100.0                                              |       | 0.9 |   |
| Costs of Merchandise  Sales (2)                                                                               |       | 71.2                                            | (3)        | 74.7                                               | (3)        | 4.4 |   |
| Costs of Service  Revenue (2)                                                                                 |       | 92.8                                            | (3)        | 95.0                                               | (3)        | (1.4 | ) |
| Total Costs of Revenues                                                                                       |       | 75.0                                            |       | 78.2                                               |       | 3.2 |   |
| Gross Profit from  Merchandise Sales                                                                          |       | 28.8                                            | (3)        | 25.3                                               | (3)        | 14.2 |   |
| Gross Profit from  Service Revenue                                                                            |       | 7.2                                             | (3)        | 5.0                                                | (3)        | 50.5 |   |
| Total Gross Profit                                                                                            |       | 25.0                                            |       | 21.8                                               |       | 15.6 |   |
| Selling, General and  Administrative Expenses                                                                 |       | 25.3                                            |       | 23.3                                               |       | (9.6 | ) |
| Net Gain (Loss) on  Sales of Assets                                                                           |       | —                                          |       | (0.1                                               | )(5)       | 133.9 |   |
| Operating Loss                                                                                                |       | (0.3                                            | )          | (1.6                                               | )          | 84.2 |   |
| Non-operating Income                                                                                          |       | 0.2                                             |       | 0.1                                                |       | 93.3 |   |
| Interest Expense                                                                                              |       | 2.8                                             |       | 1.7                                                |       | (69.3 | ) |
| Loss from Continuing  Operations Before Income Taxes and Cumulative Effect of Change in Accounting  Principle |       | (2.9                                            | )          | (3.2                                               | )          | 7.7 |   |
| Income Tax Benefit                                                                                            |       | 32.7                                            | (4)        | 34.0                                               | (4)        | 32.7 |   |
| Net Loss from  Continuing Operations Before Cumulative Effect of Change in Accounting  Principle              |       | (2.0                                            | )          | (2.1                                               | )          | 5.8 |   |
| Discontinued  Operations, Net of Tax                                                                          |       | —                                          |       | —                                             |       | — |   |
| Cumulative Effect of  Change in Accounting Principle, Net of Tax                                              |       | —                                          |       | —                                             |       | — |   |
| Net Loss                                                                                                      |       | (2.0                                            | )          | (2.1                                               | )          | 2.5 |   |

 

----

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

(2)  Costsof merchandise sales include the cost of products sold, buying, warehousing andstore occupancy costs. Costs of service revenue include service center payrolland related employee benefits and service center occupancy costs. Occupancycosts include utilities, rents, real estate and property taxes, repairs andmaintenance and depreciation and amortization expenses.

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

(4)  Asa percentage of Loss from Continuing Operations Before Income Taxes andCumulative Effect of Change in Accounting Principle.

(5)  NetGain (Loss) on Sales of Assets for 2005 was reclassified primarily from Costsof Merchandise Sales (see Note 1 of Item 1- Notes to Condensed ConsolidatedFinancial Statements).

24

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ThirteenWeeks Ended October 28, 2006 vs. Thirteen Weeks Ended October 29, 2005

Total revenuesfor the third quarter increased 0.9%. This increase was due primarily to anincrease in comparable revenues (revenues generated by locations in operationduring the same period) of 0.8%. Comparable merchandise sales increased 0.2%while comparable service revenue increased 3.9%.

Gross profitfrom merchandise sales increased, as a percentage of merchandise sales, to28.8% in fiscal 2006 from 25.3% in fiscal 2005. This was a 14.2% or $16,229,000increase from the prior period. This increase as a percentage of merchandisesales was due primarily to an increase in merchandise margins and lowerwarehousing costs, offset by higher occupancy costs. The increase inmerchandise margins resulted from the restructuring of our vendor agreements,lower freight costs and a more favorable product mix. EffectiveJanuary 29, 2006, substantially all of our vendor agreements wererestructured to no longer identify specific incremental expenses forcooperative advertising; therefore, all vendor support funds are now treated asa reduction of inventories and are recognized as an increase to gross profitfrom merchandise sales as the inventories are sold, in accordance with EITF02-16. Gross profit from merchandise sales for the thirteen weeks ended October28, 2006 improved by approximately $6,760,000 compared to the thirteen weeksended October 29, 2005 primarily as a result of these contractual changes.Warehousing costs were lower due to reduced payroll, public storage andtemporary labor costs. The increase in store occupancy costs was due to anincrease in utility and rental equipment costs, in addition to higherdepreciation costs related to a larger cumulative base of stores remodeledunder the grand reopening program.

Gross profitfrom service revenue increased, as a percentage of service revenue, to 7.2% infiscal 2006 from 5.0% in fiscal 2005. This was a 50.5% or $2,351,000 increasefrom the prior period. This increase, as a percentage of service revenue, wasdue mainly to greater service revenue, combined with a relatively flat coststructure.

Selling, generaland administrative expenses increased, as a percentage of total revenues, to25.3% in fiscal 2006 from 23.3% in fiscal 2005. This was a 9.6% or $12,218,000increase from the prior period. This increase, as a percentage of totalrevenues, was due to increased net media expense and general and administrativeexpenses. The increase in net media expense was caused by a change in ourvendor agreements, which resulted in a different application of EITF 02-16,whereby approximately $7,510,000 in vendor support funds were recorded as areduction in advertising costs for the thirteen weeks ended October 28, 2005(see above explanation of vendor agreement restructuring).  The increase in general and administrativeexpenses was due primarily to $4,550,000 for the November 21, 2006 settlementof various litigation matters.

Interest expenseincreased $6,376,000 primarily due to a charge of approximately $4,200,000 forthe remaining interest associated with the early satisfaction and discharge ofthe 4.25% Convertible Senior Notes on October 27, 2006, and the value of thesurviving conversion right expiring June 1, 2007.  Additionally, there was an approximate 25basis point increase in the weighted average interest rate on a flat weightedaverage debt level.

Results fromdiscontinued operations for the third quarter of 2006 was a loss of $205,000(net of tax) compared to a profit of $181,000 (net of tax) in the third quarterof fiscal 2005.

Cumulativeeffect of change in accounting principle, net of tax, increased from theinitial amount recorded upon adoption of FAS 123R at April 29, 2006 as a resultof a change in the estimated annual effective tax rate.

Net lossdecreased, as a percentage of total revenues, due primarily to an increase intotal gross profit, as a percentage of sales, offset by higher interest andselling, general and administrative expenses.

Results ofOperations -

The following table presents for theperiods indicated certain items in the consolidated statements of operations asa percentage of total revenues (except as otherwise provided) and thepercentage change in dollar amounts of such items compared to the indicatedprior period.

25

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| ** **                                                                                                    | ** ** | **Percentage of Total Revenues** | ** ** | **Percentage  Change**     | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                                                    | ** ** | **October 28,  2006**                      | ** ** | **October 29,  2005** | ** ** | **Favorable** | ** ** |
| **Thirty-nine weeks ended**                                                                         | ** ** | **(Fiscal 2006)**                          | ** ** | **(Fiscal 2005)**     | ** ** | **(Unfavorable)** | ** ** |
| Merchandise Sales                                                                                             |       | 82.6                                            | %          | 82.8                       | %          | (0.3 | )% |
| Service Revenue (1)                                                                                           |       | 17.4                                            |       | 17.2                       |       | (0.8 | ) |
| Total Revenues                                                                                                |       | 100.0                                           |       | 100.0                      |       | (0.1 | ) |
| Costs of Merchandise  Sales (2)                                                                               |       | 71.5                                            | (3)        | 73.8                       | (3)        | 3.5 |   |
| Costs of Service Revenue  (2)                                                                                 |       | 91.8                                            | (3)        | 89.3                       | (3)        | (3.6 | ) |
| Total Costs of Revenues                                                                                       |       | 75.0                                            |       | 76.5                       |       | 2.0 |   |
| Gross Profit from  Merchandise Sales                                                                          |       | 28.5                                            | (3)        | 26.2                       | (3)        | 8.7 |   |
| Gross Profit from  Service Revenue                                                                            |       | 8.2                                             | (3)        | 10.7                       | (3)        | (22.7 | ) |
| Total Gross Profit                                                                                            |       | 25.0                                            |       | 23.5                       |       | 6.3 |   |
| Selling, General and  Administrative Expenses                                                                 |       | 24.3                                            |       | 23.4                       |       | (3.7 | ) |
| Net Gain on Sales of  Assets                                                                                  |       | 0.3                                             |       | 0.2                        | (5)        | 109.2 |   |
| Operating Profit                                                                                              |       | 1.1                                             |       | 0.3                        |       | 300.5 |   |
| Non-operating Income                                                                                          |       | 0.3                                             |       | 0.2                        |       | 92.7 |   |
| Interest Expense                                                                                              |       | 2.2                                             |       | 1.6                        |       | (38.5 | ) |
| Loss from Continuing  Operations Before Income Taxes and Cumulative Effect of Change in Accounting  Principle |       | (0.9                                            | )          | (1.1                       | )          | 27.0 |   |
| Income Tax Benefit                                                                                            |       | 31.3                                            | (4)        | 35.8                       | (4)        | (36.2 | ) |
| Loss from Continuing  Operations Before Cumulative Effect of Change in Accounting Principle                   |       | (0.6                                            | )          | (0.8                       | )          | 21.8 |   |
| Discontinued Operations,  Net of Tax                                                                          |       | —                                          |       | —                     |       | — |   |
| Cumulative Effect of  Change in Accounting Principle, Net of Tax                                              |       | —                                          |       | —                     |       | — |   |
| Net Loss                                                                                                      |       | (0.6                                            | )          | (0.8                       | )          | 20.6 |   |

 

----

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

(2)  Costsof merchandise sales include the cost of products sold, buying, warehousing andstore occupancy costs. Costs of service revenue include service center payrolland related employee benefits and service center occupancy costs. Occupancycosts include utilities, rents, real estate and property taxes, repairs andmaintenance and depreciation and amortization expenses.

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

(4)  Asa percentage of Loss from Continuing Operations Before Income Taxes andCumulative Effect of Change in Accounting Principle.

(5)  NetGain on Sales of Assets for 2005 was reclassified primarily from Costs ofMerchandise Sales (see Note 1 of Item 1- Notes to Condensed ConsolidatedFinancial Statements).

26

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Thirty-nineWeeks Ended October 28, 2006 vs. Thirty-nine Weeks Ended October 29, 2005

Total revenuesfor the first thirty-nine weeks of fiscal 2006 decreased 0.1%. Comparablerevenues (revenues generated by locations in operation during the same period)were essentially unchanged. Comparable merchandise sales were slightlynegative, while comparable service revenue increased 1.0%.

Gross profitfrom merchandise sales increased, as a percentage of merchandise sales, to 28.5%in fiscal 2006 from 26.2% in fiscal 2005. This was an 8.7% or $31,877,000increase from the prior period. This increase as a percentage of merchandisesales was due primarily to an increase in merchandise margins and lowerwarehousing costs, offset by higher occupancy costs and purchasing payroll. Theincrease in merchandise margins resulted from the restructuring of our vendoragreements and lower inventory shrinkage estimates, offset by a less favorableproduct mix. Effective January 29, 2006, substantially all of our vendoragreements were restructured to no longer identify specific incrementalexpenses for cooperative advertising; therefore, all vendor support funds arenow treated as a reduction of inventories and are recognized as an increase to grossprofit from merchandise sales as the inventories are sold, in accordance withEITF 02-16. Gross profit from merchandise sales for the thirty-nine weeks endedOctober 28, 2006 improved by approximately $27,900,000 compared to thethirty-nine weeks ended October 29, 2005 primarily as a result of thesecontractual changes. Warehousing costs were lower due to reduced rent and lowerpublic storage, payroll and temporary labor costs. The increase in storeoccupancy costs was due to an increase in depreciation costs related to alarger cumulative base of stores remodeled under the grand reopening program,in addition to higher utility and rental equipment costs.

Gross profitfrom service revenue decreased, as a percentage of service revenue to 8.2% infiscal 2006 from 10.7% in fiscal 2005. This was a 22.7% or $7,059,000 decreasefrom the prior period. This decrease, as a percentage of service revenue, wasdue to higher payroll and depreciation costs. The increase in payroll wasprimarily due to a higher utilization of more skilled labor, increasedincentives and bonuses and increased staffing.

Selling,general and administrative expenses increased, as a percentage of totalrevenues, to 24.3% in fiscal 2006 from 23.4% in fiscal 2005. This was a 3.7% or$14,653,000 increase from the prior period. This increase, as a percentage of totalrevenues, was due to increased net media expense and general and administrativeexpense, offset by decreases in store expenses and benefits. The increase innet media expense was caused by a change in our vendor agreements whichresulted in a different application of EITF 02-16, whereby approximately$26,900,000 in vendor support funds were recorded as a reduction in advertisingcosts for the thirty-nine weeks ended October 29, 2005 (see above explanationof vendor agreement restructuring), offset by lower gross media expendituresthan were experienced in the prior year related to the grand reopenings of theLos Angeles, Philadelphia and Chicago metropolitan markets. The increase in generaland administrative expenses was due primarily to $4,550,000 for the settlementof various litigation matters and approximately $2,300,000 of costs related tothe Company’s strategic review process and the resolution of certain threatened proxy contests, offset in part, bylower hiring and moving, insuarance and systems consulting expenses. The decreasein store expenses was due primarily to a favorable insurance settlement of$2,300,000, a favorable litigation settlement of approximately $2,100,000 fromcertain of our credit card processors and reduced payroll of approximately$2,100,000.

Net gain onsales of assets increased, as a percentage of total revenues, to 0.3% in fiscal2006 from 0.2% in fiscal 2005. This was a 109.2% or $3,252,000 increase fromthe prior year. This increase, as a percentage of total revenues, was dueprimarily to a gain of $6,329,000 from a sale of a store in fiscal 2006,compared to a gain of $5,177,000 offset by a loss of $502,000 related to storessold in fiscal 2005.

Interest expenseincreased $10,532,000 primarily due to a charge of approximately $4,200,000 forthe remaining interest associated with the early satisfaction and discharge ofthe 4.25% Convertible Senior Notes on October 27, 2006, and the value of thesurviving conversion right expiring June 1, 2007.  Additionally, there was an approximate 40basis point increase in the weighted average interest rate on a higher weightedaverage debt level.

Results fromdiscontinued operations for 2006 was a loss of $338,000 (net of tax) comparedto a gain of $3,000 (net of tax) in 2005.

Net lossdecreased, as a percentage of total revenues, due primarily to an increase intotal gross profit and in net gain on sales of assets, as a percentage ofsales, offset by higher interest and selling, general and administrative costs.

27

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INDUSTRYCOMPARISON

We operate inthe U.S. automotive aftermarket, which has two general competitive arenas: theDo-It-For-Me (“DIFM”) (service labor, installed merchandise and tires) marketand the Do-It-Yourself (“DIY”) (retail merchandise) market. Generally, thespecialized automotive retailers focus on either the “DIY” or “DIFM” areas ofthe business. We believe that our operation in both the “DIY” and “DIFM” areasof the business positively differentiates us from most of our competitors.Although operating performance is measured at a store level in aggregation, webelieve that the following presentation shows an accurate comparison againstcompetitors within the two sales arenas. We compete in the “DIY” area of thebusiness through our retail sales floor and commercial sales business (RetailSales). Our Service Center Business (labor and installed merchandise and tires)competes in the DIFM area of the industry.

The followingtable presents the revenues and gross profit for each area of the business.
| ** **                                       | ** ** | **Thirteen weeks ended**     | ** ** | **Thirty-nine weeks ended**  | ** ** |
|--------------------------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|
| **(Dollar amounts in thousands)** | ** ** | **October 28, 2006  Amount** | ** ** | **October 29, 2005  Amount** | ** ** | **October 28, 2006  Amount** | ** ** | **October 29, 2005  Amount** | ** ** |
|                                             |       |                                   |       |                                   |       |   |   |   |   |
| Retail Sales (1)                                 |       | $                                      | 323,522    |                                   | $          | 328,877 |   | $ | 1,005,033 |   | $ | 1,023,087 |   |
| Service Center Revenue  (2)                      |       | 227,327                                |       | 217,027                                |       | 680,982 |   | 663,661 |   |
| Total Revenues                                   |       | $                                      | 550,849    |                                   | $          | 545,904 |   | $ | 1,686,015 |   | $ | 1,687,548 |   |
| Gross Profit from  Retail Sales (3)              |       | $                                      | 93,554     |                                   | $          | 82,969 |   | $ | 283,322 |   | $ | 262,575 |   |
| Gross Profit from  Service Center Revenue (3)    |       | 44,139                                 |       | 36,144                                 |       | 138,351 |   | 134,280 |   |
| Total Gross Profit                               |       | $                                      | 137,693    |                                   | $          | 119,113 |   | $ | 421,673 |   | $ | 396,855 |   |

 

----

(1)   Excludesrevenues from installed products.

(2)   Includesrevenues from installed products.

(3)   GrossProfit from Retail Sales includes the cost of products sold, buying,warehousing and store occupancy costs. Gross Profit from Service Center Revenueincludes the cost of installed products sold, buying, warehousing, servicecenter payroll and related employee benefits and service center occupancycosts. Occupancy costs include utilities, rents, real estate and propertytaxes, repairs and maintenance and depreciation and amortization expenses.

NEWACCOUNTING STANDARDS

InDecember 2004, the Financial Accounting Standards Board (FASB) issuedStatement of Financial Accounting Standards No. 123 (revised 2004), “Share-BasedPayment” (SFAS No. 123R) requiring that the compensation cost relating toshare-based payment transactions be recognized in financial statements. Weadopted SFAS No. 123R on January 29, 2006 using the modifiedprospective method. The impact of adopting this Standard is discussed in Note 3of Item 1 – Notes to Condensed Consolidated Financial Statements.

In June of 2006,the FASB ratified the consensus reached by the Emerging Issues Task Force on Issue 06-3,How Taxes Collected from Customers and Remitted to Governmental AuthoritiesShould be Presented in the Income Statement (That Is, Gross versus NetPresentation). The scope of this consensus includes any tax assessed by agovernmental authority that is directly imposed on a revenue-producingtransaction between a seller and a customer and may include, but is not limitedto sales, use, value added and some excise taxes. Additionally, thisconsensus seeks to address how a company should address the disclosure of suchitems in interim and annual financial statements, either gross or net pursuantto APB Opinion No. 22, Disclosure of Accounting Policies. We arerequired to adopt this statement in fiscal 2007. We presentsales net of sales taxes in our consolidated statement of operations and do notanticipate changing its policy as a result of EITF 06-3.

In July of 2006,the FASB released FASB Interpretation No. 48, Accounting for Uncertaintyin Income Taxes - an Interpretation of FASB Statement 109 (FIN 48). FIN 48prescribes a model for the recognition and measurement of a tax position takenor expected to be taken in a tax return, and provides guidance onderecognition, classification, interest and penalties, disclosure andtransition. We are required to adopt this Interpretation in fiscal 2007,and are currently evaluating the effect that this Interpretation will have onour consolidated financial statements.

In September2006, the SEC issued Staff Accounting Bulletin No. 108 (SAB 108). SAB 108provides interpretive guidance on the consideration of the effects of prioryear misstatements in quantifying current year financial statementmisstatements 

28

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for the purposeof a materiality assessment. The Company will be required to adopt theprovisions of SAB 108 in its first year ending after November 15, 2006. TheCompany does not expect the adoption of this statement to have a materialimpact on its consolidated financial statements.

In September 2006, the FASB issued SFASNo. 157, “Fair Value Measurements” (SFAS 157).  SFAS 157 defines the term fair value,establishes a framework for measuring it within GAAP and expands disclosuresabout its measurements.  SFAS 157 iseffective for financial statements issued for fiscal years beginning afterNovember 15, 2007.  We do not expect the adoption of this statementto have a material impact on our consolidated financial statements.

In September 2006, the FASB issued SFASNo. 158, “Employers’ Accounting for Defined Benefit Pension and OtherPostretirement Plans- an Amendment of FASB Statements No. 87, 88, 106 and132(R)” (SFAS 158).  SFAS 158 requiresentities to recognize the overfunded or underfunded status of its definedbenefit postretirement plan (other than a multiemployer plan) as an asset orliability in its statement of financial position and to recognize changes insuch funded status in the year in which the changes occur through comprehensiveincome.  Additionally, an entity’sdefined benefit plan assets and obligations must be measured as of the date ofthe entity’s fiscal year end statement of financial position (with limitedexception).  The funded statusrequirement under SFAS 158 is effective for financial statements issued forfiscal years ending after December 15, 2006, while the measurement daterequirement is effective as of the date of the entity’s fiscal year-endstatement of financial position for fiscal years ending after December 15,2008. We expect to reduce comprehensive income on our February 3, 2007consolidated statement of financial position by the elimination of a prepaidintangible asset and the creation of an additional liability.

CRITICALACCOUNTING POLICIES AND ESTIMATES

Management’sDiscussion and Analysis of Financial Condition and Results of Operationsdiscusses our 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 consolidated financial statements and the reported amounts ofrevenues and expenses during the reporting period. Additionally, we estimate ourinterim product gross margins in accordance with Accounting Principles BulletinNo. 28, “Interim Financial Reporting”.

On an on-goingbasis, we evaluate our estimates and judgments, including those related tocustomer incentives, product returns and warranty obligations, bad debts,inventories, income taxes, financing operations, restructuring costs,retirement benefits, risk participation agreements and contingencies andlitigation. We base our estimates and judgments on historical experience and onvarious other factors that are believed to be reasonable under thecircumstances, the results of which form the basis for making judgments aboutthe carrying values of assets and liabilities that are not readily apparentfrom other sources. Actual results may differ from these estimates underdifferent assumptions or conditions. For a detailed discussion of significantaccounting policies that may involve a higher degree of judgment or complexity,refer to “Critical Accounting Policies and Estimates” as reported in ourForm 10-K for the year ended January 28, 2006, which disclosures arehereby incorporated by reference.

FORWARD-LOOKINGSTATEMENTS

Certainstatements contained herein constitute “forward-looking statements” within themeaning of The Private Securities Litigation Reform Act of 1995. The words “guidance,”“expect,” “anticipate,” “estimates,” “forecasts” and similar expressions areintended to identify such forward-looking statements. Forward-lookingstatements include management’s expectations regarding future financialperformance, automotive aftermarket trends, levels of competition, businessdevelopment activities, future capital expenditures, financing sources andavailability and the effects of regulation and litigation. Although we believethat the expectations reflected in such forward-looking statements are based onreasonable assumptions, we can give no assurance that our expectations will beachieved. Our actual results may differ materially from the results discussedin 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.

29

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Item3. Quantitative and Qualitative Disclosures About Market Risk

The Company does not utilize financialinstruments for trading purposes and does not hold any derivative financialinstruments that could expose the Company to significant market risk. The Company’sprimary market risk exposure with regard to financial instruments is to changesin interest rates. Pursuant to the terms of its revolving credit agreement,changes in the London Interbank Offered Rate (LIBOR) could affect therates at which the Company could borrow funds thereunder. At October 28, 2006,the Company had borrowings of $6,095,000 under this facility. Additionally, theCompany has a $320,000,000 Senior Secured Term Loan facility that bearsinterest at LIBOR plus 2.75%, and approximately $122,287,000 of real estateoperating leases that vary based on changes in LIBOR.

We have enteredinto an interest rate swap, which was designated as a cash flow hedge toconvert the variable LIBOR portion of the real estate lease payments to a fixedrate of 2.90%, terminating on July 1, 2008 (coterminous with the leases notedabove). If the critical terms of the interest rate swap or the hedge item donot change, the interest rate swap will be considered to be highly effectivewith all changes in fair value included in other comprehensive income. As of October 28,2006 and January 28, 2006, the fair values ofthe interest rate swap were $4,759,000 ($3,015,000 net of tax) and $5,790,000($3,660,000, net of tax), respectively, and these changes in value wereincluded in accumulated other comprehensive loss on the consolidated balancesheet.

Item4. Controls and Procedures

EVALUATION OFDISCLOSURE CONTROLS AND PROCEDURES

Our controls andprocedures are designed to ensure that information required to be disclosed isaccumulated and communicated to our management, including our principalexecutive and principal financial officers, as appropriate to allow timelydecisions regarding required disclosure.The Company’smanagement, with the participation of the Company’s chief executive officer andchief financial officer, evaluated the effectiveness of the Company’sdisclosure controls and procedures as of the end of the period covered by thisreport. 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 are functioning effectively to providereasonable assurance that the information required to be disclosed by theCompany in reports filed under the Securities Exchange Act of 1934 is recorded,processed, summarized and reported within the time periods specified in the SEC’srules and forms.

In connectionwith the filing of this Form 10-Q, the Company’s management, with theparticipation of the Company’s chief executive officer and chief financialofficer, evaluated the effectiveness of the Company’s disclosure controls andprocedures as of the end of the period covered by this report. Based on thatevaluation, the chief executive officer and chief financial officer concludedthat our disclosure controls and procedures as of the end of the period coveredby this report were effective as of the end of the period covered by thisreport.

CHANGES ININTERNAL CONTROL OVER FINANCIAL REPORTING

No change in theCompany’s internal control over financial reporting occurred during the fiscalquarter covered by this report that has materially affected, or is reasonablylikely to materially affect, the Company’s internal control over financialreporting.

PARTII - OTHER INFORMATION

Item1. Legal Proceedings

On November 21,2006, the Company reached a settlement, subject to court approval, of threepending actions involving various wage and hour claims under the Federal FairLabor Standards Act and California state law for an aggregate amount of$4,550,000.  The Company’s condensedconsolidated financial statements included in this Quarterly Report on Form 10Qhave been adjusted  to include thissettlement.  The charge is recordedwithin SG&A expenses for the thirteen and thirty-nine weeks ended October28, 2006.

The Company is not currently engaged inany litigation arising outside the ordinary course of its business that itbelieves to be material. The Company is party to various actions and claims,including purported class actions, arising in the normal course of business.The Company believes that amounts accrued for awards or assessments inconnection with such matters are adequate and that the ultimate resolution ofthese matters will not have a material adverse effect on the Company’sfinancial position or results of operations.

30

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Item1A. Risk Factors

There have beenno changes to the risks described in the Company’s previously filed AnnualReport on Form 10-K for the fiscal year ended January 28, 2006.

Item2.    UnregisteredSales of Equity Securities and Use of Proceeds

None.

Item3.    DefaultsUpon Senior Securities

None.

Item4.    Submissionof Matters to a Vote of Security Holders

Anannual meeting of shareholders was held on October 19, 2006. The shareholderselected the directors shown below.

Directors Elected at Annual Meeting ofShareholders
| Name                  | ** ** | **Votes For** | ** ** | **Votes  Withheld** | ** ** |
|-----------------------|------------|--------------------|------------|---------------------|------------|
| William Leonard       |       | 39,016,222         |       | 14,413,045          |       |
| Peter A. Bassi        |       | 38,788,332         |       | 14,640,935          |       |
| Jane Scaccetti        |       | 38,987,893         |       | 14,441,374          |       |
| John T.  Sweetwood    |       | 38,803,842         |       | 14,625,425          |       |
| M. Shan Atkins        |       | 38,943,847         |       | 14,485,420          |       |
| Robert H. Hotz        |       | 39,184,587         |       | 14,244,680          |       |
| Max L. Lukens         |       | 51,802,513         |       | 1,626,754           |       |
| James A.  Mitarotonda |       | 41,566,638         |       | 11,862,629          |       |
| Nick White            |       | 52,038,901         |       | 1,390,366           |       |
| James A.  Williams    |       | 52,040,768         |       | 1,388,499           |       |
| Thomas R. Hudson, Jr. |       | 51,946,412         |       | 1,482,855           |       |

 

Theshareholders also voted on the appointment of the Company’s independentauditors, Deloitte & Touche, LLP, with 52,793,187 affirmative votes,548,149 negative votes and 87,931 abstentions.

Theshareholders also voted on a shareholder proposal regarding the Company’sShareholder Rights Plan with 35,046,129 affirmative votes, 9,105,045 negativevotes, 363,158 abstentions and 8,914,935 broker non-votes.

Item5.    OtherInformation

None.

Item 6.    Exhibits

| 4.1    |   | Amendment to Rights Agreement, dated August 18,  2006, between the Company and the Rights Agent.                           |   | Incorporated by reference from the Company’s Form  8-K filed August 21, 2006.  |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------|
|   |   |                                                                                                                       |   |                                                                                |
| 10.1   |   | Letter agreement dated July 17, 2006, between the  Company and William Leonard.*                                           |   | Incorporated by reference from the Company’s Form  8-K filed July 21, 2006.    |
|   |   |                                                                                                                       |   |                                                                                |
| 10.2   |   | Agreement dated August 2, 2006, between the Company and  the Barington Group.                                              |   | Incorporated by reference from the Company’s Form  8-K filed August 3, 2006.   |
|   |   |                                                                                                                       |   |                                                                                |
| 10.3   |   | Non-Competition Agreement, dated October 19, 2006,  between the Company and Mark L. Page.*                                 |   | Incorporated by reference from the Company’s Form 8-K  filed October 19, 2006. |
|   |   |                                                                                                                       |   |                                                                                |
| 10.4   |   | Amended and Restated Credit Agreement, dated October  27, 2006, among the Company, Wachovia Bank, National Association, as |   | Incorporated by reference from the Company’s Form  8-K filed October 30, 2006. |

 

31

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|        |     | Administrative Agent, and the other parties thereto.                                                                                                         |   |                                                                                |
|--------|----------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------|
|   |     |                                                                                                                                                         |   |                                                                                |
|   | 10.5     | Amendment No. 6, dated September 22, 2006, to  the Amended and Restated Loan and Security Agreement, by and among the  Company, Wachovia Bank, National |   | Incorporated by reference from the Company’s Form  8-K filed October 30, 2006. |
|   |     |                                                                                                                                                         |   |                                                                                |
|   | (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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* - Management contractor compensatory plan or arrangement.

** - Filedherewith

32

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SIGNATURES

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.
|        |             | THE PEP BOYS - MANNY, MOE & JACK |                                                |
|--------|------------------|--------------------------------------|-----------------------------------------------------|
|   |             | (Registrant)                         |                                                |
|   |             |                                 |                                                |
| Date:  | December 6, 2006 |                                 |                                                | by: | /s/ Harry F. Yanowitz |   |   |
|   |             |                                 |                                                |   |
|   |             |                                 | Harry F. Yanowitz                                   |   |
|   |             |                                 | Senior Vice President and   Chief Financial Officer |   |
|        |                  |                                      |                                                     |  |  |  |  |

 

33

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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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** - Filedherewith

34

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