**UNITED STATESSECURITIES 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 May 5, 2007** |
| ** **                                      | ** ** | ** ** |
| **OR**                                          |
| ** **                                      |
| **o**                                           | ** ** | **Transition Report Pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934** |
|                                                 |  |  |  |  |

 

**For thetransition period from             to           **

**CommissionFile No. 1-3381**

**The Pep Boys - Manny, Moe & Jack**

(Exact name 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 mark whether the registrant(1) has filed all reports required to be filed by Section 13 or15(d) of the Securities and Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports); and (2) has been subject to such filing requirements forthe past 90 days.   Yes x   No o

Indicate by checkmark whether the registrant isa large accelerated filer, an accelerated filer, or a non-accelerated filer.See definition of “accelerated filer and large accelerated filer” inRule 12b-2 of the Exchange Act. (Check one):

| Large accelerated  filer  o    Accelerated  filer  x    Non-accelerated  filer  o |
|---------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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

As of June 1, 2007 there were 51,404,789 sharesof the registrant’s Common Stock outstanding.

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| Index                               | ** ** | ** **                                                                                  | ** ** | **Page** |
|-------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|----------|
| PART I - FINANCIAL INFORMATION |       |                                                                                        |       |     |
|                                |       |                                                                                        |       |     |   |   |
| Item 1.                             |       | Condensed Consolidated Financial Statements  (Unaudited)                                    |       |     |   |   |
|                                |       |                                                                                        |       |     |   |   |
|                                |       | Consolidated  Balance Sheets -                                                              |       |     |   |   |
|                                |       | May 5, 2007 and  February 3, 2007                                                           |       |     | 3 |   |
|                                |       |                                                                                        |       |     |   |   |
|                                |       | Consolidated  Statements of Operations -                                                    |       |     |   |   |
|                                |       | Thirteen weeks  ended May 5, 2007 and April 29, 2006                                        |       |     | 4 |   |
|                                |       |                                                                                        |       |     |   |   |
|                                |       | Consolidated  Statements of Cash Flows -                                                    |       |     |   |   |
|                                |       | Thirteen weeks  ended May 5, 2007 and April 29, 2006                                        |       |     | 5 |   |
|                                |       |                                                                                        |       |     |   |   |
|                                |       | Notes to Condensed Consolidated Financial Statements                                        |       |     | 6-14 |   |
|                                |       |                                                                                        |       |     |   |   |
| Item 2.                             |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations |       |     | 15-19 |   |
|                                |       |                                                                                        |       |     |   |   |
| Item 3.                             |       | Quantitative and Qualitative Disclosures About  Market Risk                                 |       |     | 20 |   |
|                                |       |                                                                                        |       |     |   |   |
| Item 4.                             |       | Controls and Procedures                                                                     |       |     | 20 |   |
|                                |       |                                                                                        |       |     |   |   |
| PART II - OTHER INFORMATION    |       |                                                                                        |       |     |
|                                |       |                                                                                        |       |     |   |   |
| Item 1.                             |       | Legal Proceedings                                                                           |       |     | 21 |   |
|                                |       |                                                                                        |       |     |   |   |
| Item 1A.                            |       | Risk Factors                                                                                |       |     | 21 |   |
|                                |       |                                                                                        |       |     |   |   |
| Item 2.                             |       | Unregistered Sales of Equity Securities and Use of  Proceeds                                |       |     | 21 |   |
|                                |       |                                                                                        |       |     |   |   |
| Item 3.                             |       | Defaults Upon Senior Securities                                                             |       |     | 21 |   |
|                                |       |                                                                                        |       |     |   |   |
| Item 4.                             |       | Submission of Matters to a Vote of Security Holders                                         |       |     | 21 |   |
|                                |       |                                                                                        |       |     |   |   |
| Item 5.                             |       | Other Information                                                                           |       |     | 21 |   |
|                                |       |                                                                                        |       |     |   |   |
| Item 6.                             |       | Exhibits                                                                                    |       |     | 22 |   |
|                                |       |                                                                                        |       |     |   |   |
| SIGNATURES                          |       |                                                                                        | 23         |     |
|                                |       |                                                                                        |       |     |   |   |
| INDEX TO EXHIBITS                   |       |                                                                                        | 24         |     |

 

2

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PART I - FINANCIAL INFORMATION

Item 1. Condensed Consolidated FinancialStatements (Unaudited)

THEPEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(dollar amounts in thousands, except share data)

UNAUDITED
| ** **                                                                    | ** ** | **May 5, 2007** | ** ** | **February 3, 2007** | ** ** |
|-------------------------------------------------------------------------------|------------|---------------------------|------------|--------------------------------|------------|
| **ASSETS**                                                                    |       |                      |       |                           |       |
| Current Assets:                                                               |       |                      |       |                           |       |
| Cash and cash  equivalents                                                    |       | $                         | 30,781     |                           | $          | 21,884 |   |
| Accounts  receivable, net                                                     |       | 31,261                    |       | 29,582                         |       |
| Merchandise  inventories                                                      |       | 618,814                   |       | 607,042                        |       |
| Prepaid expenses                                                              |       | 40,145                    |       | 39,264                         |       |
| Other                                                                         |       | 62,142                    |       | 70,368                         |       |
| Total Current  Assets                                                         |       | 783,143                   |       | 768,140                        |       |
| Property and Equipment  - at cost:                                            |       |                      |       |                           |       |
| Land                                                                          |       | 251,705                   |       | 251,705                        |       |
| Buildings and  improvements                                                   |       | 931,268                   |       | 929,225                        |       |
| Furniture,  fixtures and equipment                                            |       | 692,391                   |       | 684,042                        |       |
| Construction in  progress                                                     |       | 3,049                     |       | 3,464                          |       |
|                                                                          |       | 1,878,413                 |       | 1,868,436                      |       |
| Less accumulated  depreciation and amortization                               |       | 982,585                   |       | 962,189                        |       |
| Property and  Equipment - net                                                 |       | 895,828                   |       | 906,247                        |       |
| Deferred income taxes                                                         |       | 24,845                    |       | 24,828                         |       |
| Other                                                                         |       | 64,476                    |       | 67,984                         |       |
| Total Assets                                                                  |       | $                         | 1,768,292  |                           | $          | 1,767,199 |   |
|                                                                          |       |                      |       |                           |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                | ** ** | ** **                | ** ** | ** **                     | ** ** |
| Current Liabilities:                                                          |       |                      |       |                           |       |
| Accounts payable                                                              |       | $                         | 232,872    |                           | $          | 265,489 |   |
| Trade payable  program liability                                              |       | 14,046                    |       | 13,990                         |       |
| Accrued expenses                                                              |       | 281,120                   |       | 292,280                        |       |
| Deferred income  taxes                                                        |       | 25,215                    |       | 28,931                         |       |
| Current  maturities of long-term debt and obligations under capital leases    |       | 3,474                     |       | 3,490                          |       |
| Total Current  Liabilities                                                    |       | 556,727                   |       | 604,180                        |       |
|                                                                          |       |                      |       |                           |       |
| Long-term debt and  obligations under capital leases, less current maturities |       | 623,761                   |       | 535,031                        |       |
| Other long-term  liabilities                                                  |       | 66,339                    |       | 60,233                         |       |
| 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                                                   |       | 292,837                   |       | 289,384                        |       |
| Retained  earnings                                                            |       | 462,757                   |       | 463,797                        |       |
| Accumulated  other comprehensive loss                                         |       | (9,906                    | )          | (9,380                         | )          |
| Less cost of  shares in treasury - 15,000,595 shares and 12,427,687 shares    |       | 233,516                   |       | 185,339                        |       |
| Less cost of  shares in benefits trust - 2,195,270 shares                     |       | 59,264                    |       | 59,264                         |       |
| Total Stockholders’  Equity                                              |       | 521,465                   |       | 567,755                        |       |
| Total Liabilities and Stockholders’ Equity                               |       | $                         | 1,768,292  |                           | $          | 1,767,199 |   |

 

See notes to condensed consolidated financialstatements.

 

3

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THE PEP BOYS - MANNY,MOE & JACK AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS(dollar amounts in thousands, except per share amounts)UNAUDITED
| **Thirteen weeks ended**                                                                                       | ** ** | **May 5, 2007** | ** ** | **April 29, 2006** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|---------------------------|------------|------------------------------|------------|
| Merchandise  Sales                                                                                                       |       | $                         | 445,035    |                         | $          | 457,315 |   |
| Service Revenue                                                                                                          |       | 100,978                   |       | 99,286                       |       |
| Total Revenues                                                                                                           |       | 546,013                   |       | 556,601                      |       |
| Costs of Merchandise  Sales                                                                                              |       | 315,310                   |       | 329,548                      |       |
| Costs of Service  Revenue                                                                                                |       | 88,911                    |       | 88,175                       |       |
| Total Costs of  Revenues                                                                                                 |       | 404,221                   |       | 417,723                      |       |
| Gross Profit  from Merchandise Sales                                                                                     |       | 129,725                   |       | 127,767                      |       |
| Gross Profit  from Service Revenue                                                                                       |       | 12,067                    |       | 11,111                       |       |
| Total Gross  Profit                                                                                                      |       | 141,792                   |       | 138,878                      |       |
| Selling, General  and Administrative Expenses                                                                            |       | 128,072                   |       | 131,221                      |       |
| Net Gain (Loss)  from Dispositions of Assets                                                                             |       | 2,359                     |       | (415                         | )          |
| **Operating  Profit**                                                                                                    | ** ** | **16,079**                | ** ** | **7,242**                    | ** ** |
| Non-operating  Income                                                                                                    |       | 1,905                     |       | 2,259                        |       |
| Interest Expense                                                                                                         |       | 12,656                    |       | 10,337                       |       |
| Earnings (Loss)  From Continuing Operations Before Income Taxes and Cumulative Effect of  Change in Accounting Principle |       | 5,328                     |       | (836                         | )          |
| Income Tax  Expense                                                                                                      |       | 2,108                     |       | 31                           |       |
| Net Earnings  (Loss) From Continuing Operations Before Cumulative Effect of Change in  Accounting Principle              |       | 3,220                     |       | (867                         | )          |
| Loss From  Discontinued Operations, Net of Tax                                                                           |       | (45                       | )          | (103                         | )          |
| Cumulative  Effect of Change in Accounting Principle, Net of Tax                                                         |       | —                    |       | 267                          |       |
| **Net  Earnings (Loss)**                                                                                                 | ** ** | **3,175**                 | ** ** | **(703**                     | **)**      |
|                                                                                                                     |       |                      |       |                         |       |
| Retained  Earnings, beginning of period                                                                                  |       | 463,797                   |       | 481,926                      |       |
| Cumulative  effect adjustment for adoption of FIN 48                                                                     |       | (155                      | )          | —                       |       |
| Cash Dividends                                                                                                           |       | (3,581                    | )          | (3,705                       | )          |
| Effect of Stock  Options                                                                                                 |       | (479                      | )          | (66                          | )          |
| Dividend  Reinvestment Plan                                                                                              |       | —                    |       | (14                          | )          |
| Retained  Earnings, end of period                                                                                        |       | $                         | 462,757    |                         | $          | 477,438 |   |
|                                                                                                                     |       |                      |       |                         |       |
| Basic Earnings (Loss)  Per Share:                                                                                        |       |                      |       |                         |       |
| Basic weighted  average shares outstanding                                                                               |       | 53,122                    |       | 54,224                       |       |
|                                                                                                                     |       |                      |       |                         |       |
| Net Earnings  (Loss) from Continuing Operations Before Cumulative Effect of Change in  Accounting Principle              |       | $                         | 0.06       |                         | $          | (0.02 | ) |
| Discontinued  Operations, Net of Tax                                                                                     |       | —                    |       | —                       |       |
| Cumulative  Effect of Change in Accounting Principle, Net of Tax                                                         |       | —                    |       | 0.01                         |       |
| Basic Earnings  (Loss) Per Share                                                                                         |       | $                         | 0.06       |                         | $          | (0.01 | ) |
|                                                                                                                     |       |                      |       |                         |       |
| Diluted Earnings  (Loss) Per Share:                                                                                      |       |                      |       |                         |       |
| Diluted weighted  average shares outstanding                                                                             |       | 53,634                    |       | 54,224                       |       |
|                                                                                                                     |       |                      |       |                         |       |
| Net Earnings  (Loss) from Continuing Operations Before Cumulative Effect of Change in  Accounting Principle              |       | $                         | 0.06       |                         | $          | (0.02 | ) |
| Discontinued  Operations, Net of Tax                                                                                     |       | —                    |       | —                       |       |
| Cumulative  Effect of Change in Accounting Principle, Net of Tax                                                         |       | —                    |       | 0.01                         |       |
| Diluted Earnings  (Loss) Per Share                                                                                       |       | $                         | 0.06       |                         | $          | (0.01 | ) |
|                                                                                                                     |       |                      |       |                         |       |
| Cash Dividends Per  Share                                                                                                |       | $                         | 0.0675     |                         | $          | 0.0675 |   |

 

See notes to condensed consolidated financialstatements. 

4

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THE PEP BOYS - MANNY,MOE & JACK AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(dollar amounts in thousands)UNAUDITED
| **Thirteen weeks ended**                                                                      | ** ** | **May 5, 2007** | ** ** | **April 29, 2006** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|---------------------------|------------|------------------------------|------------|
| Cash Flows from  Operating Activities:                                                                  |       |                      |       |                         |       |
| Net Earnings (Loss)                                                                                     |       | $                         | 3,175      |                         | $          | (703 | ) |
| Adjustments to  reconcile net earnings (loss) to net cash (used in) provided by continuing  operations: |       |                      |       |                         |       |
| Net loss from  discontinued operations                                                                  |       | 45                        |       | 103                          |       |
| Depreciation and  amortization                                                                          |       | 21,111                    |       | 20,723                       |       |
| Cumulative  effect of change in accounting principle, net of tax                                        |       | —                    |       | (267                         | )          |
| Accretion of  asset disposal obligation                                                                 |       | 65                        |       | 67                           |       |
| Stock  compensation expense                                                                             |       | 4,390                     |       | 1,148                        |       |
| Deferred income  taxes                                                                                  |       | 1,642                     |       | (90                          | )          |
| (Gain) loss from  dispositions of assets & insurance recoveries                                     |       | (3,719                    | )          | 415                          |       |
| Loss from derivative  valuation                                                                         |       | 1,802                     |       | —                       |       |
| Excess tax  benefits from stock based awards                                                            |       | (301                      | )          | (23                          | )          |
| Increase in cash  surrender value of life insurance policies                                            |       | (534                      | )          | (385                         | )          |
| Changes in  Operating Assets and Liabilities:                                                           |       |                      |       |                         |       |
| Decrease in  accounts receivable, prepaid expenses and other                                            |       | 10,178                    |       | 12,901                       |       |
| Increase in  merchandise inventories                                                                    |       | (11,772                   | )          | (2,358                       | )          |
| Decrease in  accounts payable                                                                           |       | (32,617                   | )          | (5,200                       | )          |
| Decrease in  accrued expenses                                                                           |       | (2,257                    | )          | (10,088                      | )          |
| Increase in  other long-term liabilities                                                                |       | 1,075                     |       | 696                          |       |
| Net cash (used in)  provided by continuing operations                                                   |       | (7,717                    | )          | 16,939                       |       |
| Net cash used in  discontinued operations                                                               |       | (90                       | )          | (165                         | )          |
| Net Cash (Used in)  Provided by Operating Activities                                                    |       | (7,807                    | )          | 16,774                       |       |
|                                                                                                    |       |                      |       |                         |       |
| Cash Flows from  Investing Activities:                                                                  |       |                      |       |                         |       |
| Cash paid for property  and equipment                                                                   |       | (11,610                   | )          | (5,628                       | )          |
| Proceeds from  dispositions of assets                                                                   |       | —                    |       | 135                          |       |
| Net Cash Used in  Investing Activities                                                                  |       | (11,610                   | )          | (5,493                       | )          |
|                                                                                                    |       |                      |       |                         |       |
| Cash Flows from  Financing Activities:                                                                  |       |                      |       |                         |       |
| Net borrowings  (payments) under line of credit agreements                                              |       | 89,605                    |       | (6,450                       | )          |
| Excess tax  benefits from stock based awards                                                            |       | 301                       |       | 23                           |       |
| Net borrowings  on trade payable program liability                                                      |       | 56                        |       | 2,087                        |       |
| Reduction of  long-term debt                                                                            |       | (808                      | )          | (5                           | )          |
| Payments on  capital lease obligations                                                                  |       | (83                       | )          | (81                          | )          |
| Dividends paid                                                                                          |       | (3,581                    | )          | (3,705                       | )          |
| Repurchase of  common stock                                                                             |       | (58,152                   | )          | —                       |       |
| Proceeds from  exercise of stock options                                                                |       | 773                       |       | 48                           |       |
| Proceeds from  dividend reinvestment plan                                                               |       | 203                       |       | 219                          |       |
| Net Cash Provided by  (Used in) Financing Activities                                                    |       | 28,314                    |       | (7,864                       | )          |
| Net Increase in Cash  and Cash Equivalents                                                              |       | 8,897                     |       | 3,417                        |       |
| Cash and Cash  Equivalents at Beginning of Period                                                       |       | 21,884                    |       | 48,281                       |       |
| Cash and Cash  Equivalents at End of Period                                                             |       | $                         | 30,781     |                         | $          | 51,698 |   |
|                                                                                                    |       |                      |       |                         |       |
| Supplemental Disclosure  of Cash Flow Information:                                                      |       |                      |       |                         |       |
| Non-cash investing  activities:                                                                         |       |                      |       |                         |       |
| Accrued purchases of  property and equipment                                                            |       | $                         | 2,804      |                         | $          | 672 |   |

Seenotes to condensed consolidated financial statements. 

5

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THE PEP BOYS - MANNY, MOE & JACK ANDSUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. Condensed Consolidated FinancialStatements

The consolidated balance sheet as of May 5,2007, the consolidated statements of operations for the thirteen week periodsended May 5, 2007 and April 29, 2006 and the consolidated statements ofcash flows for the thirteen week periods ended May 5, 2007 and April 29,2006 are unaudited. In the opinion of management, all adjustments necessary topresent fairly the financial position, results of operations and cash flows atMay 5, 2007 and for all periods presented have been made.

Certain information and footnote disclosuresnormally included in financial statements prepared in accordance withaccounting principles generally accepted in the United States of America havebeen condensed or omitted, as permitted by Rule 10-01 of the Securitiesand Exchange Commission’s Regulation S-X, “Interim Financial Statements”. It issuggested that these consolidated financial statements be read in conjunctionwith the financial statements and notes thereto included in the Company’sAnnual Report on Form 10-K for the fiscal year ended February 3, 2007. Theresults of operations for the thirteen weeks ended May 5, 2007 are notnecessarily indicative of the operating results for the full year.

NOTE 2. New Accounting Standards

Adopted:

In June 2006, the FASB issued FinancialInterpretation No 48, “Accounting for Uncertainty in Income Taxes” (FIN 48),which clarifies the accounting for uncertainty in income taxes recognized in acompany’s financial statements in accordance with the Financial AccountingStandards Board (FASB) Statement of Financial Accounting Standards No 109, “Accountingfor Income Taxes”.  The interpretationprescribes a recognition threshold and measurement attribute criteria for thefinancial statement recognition and measurement of a tax position taken orexpected to be taken in a tax return. The interpretation also provides guidance on derecognition, classification,interest and penalties, accounting in interim periods, disclosure andtransition.

The Company and its subsidiaries file income taxreturns in the U.S federal, various states and Puerto Rico jurisdictions.  The Company is no longer subject to federalincome tax examination by tax authorities for years before fiscal 2001.  The federal audit of tax fiscal years 2001,2002 and 2003 has been completed, but is still pending review by the JointCommittee on Taxation. The impact of any changes made as a result of a federalaudit remains subject to examination by various states for a period of up toone year after notification of such changes to the respective states.  State and local income tax returns aregenerally subject to examination for a period of three to five years afterfiling of the respective return. The Company and its subsidiaries have variousstate income tax returns in the process of examination, appeals and litigation.

The Company adopted the provisions of FIN 48 onFebruary 4, 2007.  In connection with theadoption, the Company recorded a net decrease to retained earnings of $155,000and reclassified certain previously recognized deferred tax attributes as FIN48 liabilities.  The amount ofunrecognized tax benefits at February 4, 2007 was $7,126,000 of which$2,216,000 would impact the Company’s tax rate, if recognized.  The amount of unrecognized tax benefits didnot materially change as of May 5, 2007.

The Company recognizespotential interest and penalties for unrecognized tax benefits in income taxexpense and, accordingly, during the thirteen weeks ended May 5, 2007, theCompany recognized approximately $25,282 in potential interest and penaltiesassociated with uncertain tax positions. At February 5, 2007, the Company has recorded approximately $734,000 forthe payment of interest and penalties, which is included in the $7,126,000unrecognized tax benefit noted above.  

The Company’s tax returns are under variousaudits, including a review by the Joint Committee of Taxation, certain of whichare scheduled to be finalized with the next twelve months. It is reasonablypossible that the uncertain tax positions relative to the years under auditcould be resolved in Company’s favor resulting in the recognition of up to$4,227,000 of additional income tax benefit.

In February 2006, the FASBissued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments—anamendment of FASB Statements No. 133 and 140.” This statement simplifiesaccounting for certain hybrid instruments currently governed by SFAS No. 133,“Accounting for Derivative Instruments and Hedging Activities,” or SFAS No.133, by allowing fair value remeasurement of hybrid instruments that contain anembedded derivative that otherwise would require bifurcation. The Companyadopted this standard on February 4, 2007, which did not affect our financialstatements.

 

In March 2006, the FASB issued SFAS No. 156, “Accounting forServicing of Financial Assets—an amendment of FASB Statement No. 140.”SFAS No. 156 amends SFAS No. 140, “Accounting for Transfers andServicing of Financial Assets and Extinguishments of Liabilities,” with respectto the accounting for separately recognized servicing assets and servicingliabilities. SFAS No. 156 is effective for fiscal years beginning afterSeptember 15, 2006. The Company adopted this standard on February 4, 2007,which did not affect our financial statements.

 

In June of 2006, the FASB ratified the consensus reached by theEmerging Issues Task Force (EITF) on Issue 06-3, How Taxes Collected fromCustomers and Remitted to Governmental Authorities Should be Presented in theIncome Statement (That Is, Gross versus Net Presentation). The Companypresents sales net of sales taxes in its consolidated statement of operationsand the adoption of this EITF did not affect our financial statements.

 

To beadopted:

In September 2006, the FASB issuedStatement of Financial Accounting Standards (SFAS) No. 157, “Fair ValueMeasurements” (SFAS No. 157). SFAS 157 defines the term fair value, establishesa framework for measuring it within generally accepted accounting principlesand expands disclosures about its measurements. SFAS No. 157 is effectivefor financial statements issued for fiscal years beginning afterNovember 15, 2007. The Company is currently evaluating the impact of SFASNo. 157.

6

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In February 2007, the FASB issued SFASNo. 159, “The Fair Value Option for Financial Assets and FinancialLiabilities.” SFAS No. 159 permits entities to choose to measure manyfinancial instruments and certain other items at fair value. SFAS No. 159is effective for fiscal years beginning after November 15, 2007. TheCompany is currently evaluating the impact of SFAS No. 159.

  In March 2007, the EmergingIssues Task Force (“EITF”) reached a consensus on issue number 06-10, “Accountingfor Deferred Compensation and Postretirement Benefit Aspects of CollateralAssignment Split-Dollar Life Insurance Arrangements”, (“EITF 06-10”). EITF06-10 provides guidance to help companies determine whether a liability for thepostretirement benefit associated with a collateral assignment split-dollarlife insurance arrangement should be recorded in accordance with either SFASNo. 106, “Employers’ Accounting for Postretirement Benefits Other ThanPensions” (if, in substance, a postretirement benefit plan exists), orAccounting Principles Board Opinion No. 12. (if the arrangement is, insubstance, an individual deferred compensation contract). EITF 06-10 alsoprovides guidance on how a company should recognize and measure the asset in acollateral assignment split-dollar life insurance contract. EITF 06-10 iseffective for fiscal years beginning after December 15, 2007, althoughearly adoption is permitted. The Company is currently evaluating the impact ofEITF 06-10.

NOTE 3. Accounting for Stock-Based Compensation

The Company has stock-based compensation plans,under which it grants stock options and restricted stock units to key employeesand members of its Board of Directors. Generally, new stock option grants vestover a four-year period, with one-fifth vesting on each of the grant date andthe next four anniversaries thereof and have an expiration date of sevenyears.  Generally, new restricted stockunit grants vest over a four-year period, with one-fourth vesting on each ofthe first four anniversaries of the grant date. During the first quarter endedMay 5, 2007, we granted 1,052,367 stock options with a weighted average fairvalue of $5.09 per option and 630,300 restricted stock units with a weightedaverage fair value of $15.26 per unit. Such grants included an inducement grantof 1,000,000 stock options and 500,000 restricted stock units to ournewly-hired President & Chief Executive Officer on March 13, 2007.One-fourth of such awards vest on each of the first three anniversaries of thedate of grant.

In accordance with SFAS No. 123(R), we recognizecompensation expense on a straight-line basis over the vesting period. Werecognized $4,390,000 and $1,148,000 of stock-based compensation expense duringthe thirteen weeks ended May 5, 2007 and April 29, 2006.

NOTE 4. Merchandise Inventories

Merchandise inventories are valued at the lowerof cost or market. Cost is determined by using the last-in, first-out (LIFO)method. An actual valuation of inventory under the LIFO method can be made onlyat the end of each fiscal year based on inventory and costs at that time.Accordingly, interim LIFO calculations must be based on management’s estimatesof expected fiscal year-end inventory levels and costs. If the first-in,first-out (FIFO) method of costing inventory had been used by the Company,inventory would have been  $605,139,000and $593,265,000 as of May 5, 2007 and February 3, 2007, respectively.

The Company also records valuation adjustments(reserves) for potentially excess and obsolete inventories based on currentinventory levels, the historical analysis of product sales and current marketconditions. The nature of the Company’s inventory is such that the risk ofobsolescence is minimal and excess inventory has historically been returned tothe Company’s vendors for credit. The Company provides reserves when less thanfull credit is expected from a vendor or when market is lower than recordedcosts. The reserves are revised, if necessary, on a quarterly basis foradequacy. The Company’s reserves against inventory for these matters were $14,178,000 at May 5, 2007 and $ 13,462,000 at February 3, 2007.

7

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NOTE 5. Other Current Assets

The Company’s other current assets for theperiods ended May 5, 2007 and February 3, 2007 were as follows:
| ** **                                       | ** ** | **May 5,** | ** ** | **February 3,** | ** ** |
|--------------------------------------------------|------------|-----------------|------------|----------------------|------------|
| **(dollar amounts in thousands)** | ** ** | **2007**        | ** ** | **2007**             | ** ** |
|                                             |       |            |       |                 |       |
| Reinsurance  premiums and receivable             |       | $               | 62,038     |                 | $          | 69,239 |   |
| Other                                            |       | 104             |       | 1,129                |       |
| Total                                            |       | $               | 62,142     |                 | $          | 70,368 |   |

 

NOTE 6. Discontinued Operations

In accordance with SFAS No. 144, ourdiscontinued operations continues to reflect the costs associated with thestores remaining from the 33 stores closed on July 31, 2003 as part of ourcorporate restructuring. The remaining reserve balance is not material.

During the second quarter of fiscal 2006, wesold a store that we have leased back and will continue to operate. Due to oursignificant continuing involvement with this store following the sale, wereclassified back into continuing operations, for all periods presented, thisstore’s revenues and costs that had been previously classified intodiscontinued operations during the third quarter of fiscal 2005, in accordancewith SFAS No. 144 and EITF No. 03-13.

NOTE 7. Pension and Savings Plan

Pension expense includes the following:
| ** **                                       | ** ** | **Thirteen weeks ended** | ** ** |
|--------------------------------------------------|------------|------------------------------------|------------|
| **(dollar amounts in thousands)** | ** ** | **May 5, 2007**          | ** ** | **April 29, 2006** | ** ** |
|                                             |       |                               |       |   |   |
| Service cost                                     |       | $                                  | 51         |   | $ | 73 |   |
| Interest Cost                                    |       | 836                                |       | 756 |   |
| Expected return  on plan assets                  |       | (587                               | )          | (581 | ) |
| Amortization of  transition obligation           |       | 41                                 |       | 41 |   |
| Amortization of  prior service cost              |       | 91                                 |       | 87 |   |
| Amortization of  net loss                        |       | 488                                |       | 528 |   |
| Net periodic benefit  cost                       |       | $                                  | 920        |   | $ | 904 |   |

 

The Company has a qualified defined benefitpension plan with accrued benefits frozen at December 31, 1996. The Companymakes contributions to this plan in accordance with the requirements of ERISA.The Company does not anticipate making a contribution to this plan duringfiscal 2007.

The Company has an unfunded, non-qualifiedExecutive Supplemental Retirement Plan (SERP) defined benefit plan that wasclosed to new participants on January 31, 2004. As of May 5, 2007, the Companycontributed $80,000 of an anticipated $1,258,000 contribution during fiscal2007 to this plan.

The Company has a non-qualified SERP definedcontribution plan for key employees who were designated by the Board ofDirectors after January 31, 2004. The Company’s contribution expense for thedefined contribution portion of the plan was approximately $212,000 and$244,000 for the thirteen weeks ended May 5, 2007, and April 29, 2006,respectively.

The Company has two 401(k) savings plans,which cover all full-time employees who are at least 21 years of age with oneor more years of service. The Company contributes the lesser of 50% of thefirst 6% of a participant’s contributions or 3% of the participant’scompensation. The Company’s savings plans’ contribution expense wasapproximately $976,000 and $829,000 for the thirteen weeks ended May 5, 2007and April 29, 2006, respectively.

8

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NOTE 8. Debt and Financing Arrangements

On February 15, 2007, the Company amendedits $320,000,000 Senior Secured Term Loan, due in 2013, to reduce the interestrate from London Interbank Offered Rate (LIBOR) plus 2.75% to LIBOR plus 2.00%.

NOTE 9. Warranty Reserve

The Company provides warranties for both itsmerchandise sales and service labor. Warranties for merchandise are generallycovered by the respective vendors, with the Company covering any costs abovethe vendor’s stipulated allowance. Service labor warranties are covered in fullby the Company on a limited lifetime basis. The Company establishes itswarranty reserves based on historical data of warranty transactions.

Components of the reserve for warranty costs forthe thirteen-week period ended May 5, 2007 were as follows:
| **(dollar amounts in thousands)** | ** ** | ** ** | ** ** |
|--------------------------------------------------|------------|------------|------------|
| Beginning  balance at February 3, 2007           |       | $          | 645        |   |
|                                             |       |       |       |
| Additions  related to current period sales       |       | 2,576      |       |
|                                             |       |       |       |
| Warranty costs  incurred in current period       |       | (2,750     | )          |
|                                             |       |       |       |
| Ending Balance at May  5, 2007                   |       | $          | 471        |   |

 

NOTE 10. Supplemental Guarantor Information

The Company’s $200,000,000 aggregate principalamount of 7.50% Senior Subordinated Notes is unconditionally guaranteed bycertain of the Company’s direct and indirect operating subsidiaries, The PepBoys Manny Moe & Jack of California, Pep Boys - Manny Moe &Jack of Delaware, Inc., Pep Boys — Manny Moe & Jack of PuertoRico, Inc. and PBY Corporation.

The following are condensed consolidatingbalance sheets of the Company as of May 5, 2007 and February 3, 2007 and therelated condensed consolidating statements of operations and condensedconsolidating statements of cash flows for the thirteen weeks ended May 5, 2007and April 29, 2006.

 

9

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** **

CONDENSED CONSOLIDATINGBALANCE SHEET(dollars in thousands)(unaudited)
| **As of May 5, 2007**                                     | ** ** | **Pep Boys** | ** ** | **Subsidiary  Guarantors** | ** ** | **Subsidiary  Non-  Guarantors** | ** ** | **Consolidation/  Elimination** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------------------------------|------------|-------------------|------------|----------------------------|------------|----------------------------------|------------|---------------------------------|------------|------------------|------------|
| **ASSETS**                                                                    |       |              |       |                       |       |                             |       |                            |       |             |       |
| Current Assets:                                                               |       |              |       |                       |       |                             |       |                            |       |             |       |
| Cash and cash  equivalents                                                    |       | $                 | 13,986     |                       | $          | 12,972                           |       | $                               | 3,823      |             | $          | — |   | $ | 30,781 |   |
| Accounts  receivable, net                                                     |       | 33,806            |       | —                     |       | —                           |       | (2,545                          | )          | 31,261           |       |
| Merchandise  inventories                                                      |       | 232,890           |       | 385,924                    |       | —                           |       | —                          |       | 618,814          |       |
| Prepaid expenses                                                              |       | 35,211            |       | 11,038                     |       | 18,212                           |       | (24,316                         | )          | 40,145           |       |
| Other                                                                         |       | 458               |       | 12                         |       | 61,672                           |       | —                          |       | 62,142           |       |
| Total Current  Assets                                                         |       | 316,351           |       | 409,946                    |       | 83,707                           |       | (26,861                         | )          | 783,143          |       |
| Property and  Equipment—at cost:                                         |       |              |       |                       |       |                             |       |                            |       |             |       |
| Land                                                                          |       | 78,508            |       | 166,766                    |       | 12,893                           |       | (6,462                          | )          | 251,705          |       |
| Buildings and  improvements                                                   |       | 310,459           |       | 610,484                    |       | 20,937                           |       | (10,612                         | )          | 931,268          |       |
| Furniture,  fixtures and equipment                                            |       | 289,628           |       | 402,763                    |       | —                           |       | —                          |       | 692,391          |       |
| Construction in  progress                                                     |       | 2,674             |       | 375                        |       | —                           |       | —                          |       | 3,049            |       |
|                                                                          |       | 681,269           |       | 1,180,388                  |       | 33,830                           |       | (17,074                         | )          | 1,878,413        |       |
| Less accumulated  depreciation and amortization                               |       | 389,517           |       | 589,307                    |       | 411                              |       | 3,350                           |       | 982,585          |       |
| Total Property  and Equipment—Net                                        |       | 291,752           |       | 591,081                    |       | 33,419                           |       | (20,424                         | )          | 895,828          |       |
| Investment in  subsidiaries                                                   |       | 1,558,353         |       | 1,384,492                  |       | —                           |       | (2,942,845                      | )          | —           |       |
| Intercompany  receivable                                                      |       | —            |       | 823,495                    |       | 78,091                           |       | (901,586                        | )          | —           |       |
| Deferred income  taxes                                                        |       | 23,163            |       | 1,682                      |       | —                           |       | —                          |       | 24,845           |       |
| Other                                                                         |       | 60,567            |       | 3,909                      |       | —                           |       | —                          |       | 64,476           |       |
| Total Assets                                                                  |       | $                 | 2,250,186  |                       | $          | 3,214,605                        |       | $                               | 195,217    |             | $          | (3,891,716 | ) | $ | 1,768,292 |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                 |       |              |       |                       |       |                             |       |
| Current  Liabilities:                                                         |       |              |       |                       |       |                             |       |                            |       |             |       |
| Accounts payable                                                              |       | $                 | 232,863    |                       | $          | 9                                |       | $                               | —     |             | $          | — |   | $ | 232,872 |   |
| Trade payable  program liability                                              |       | 14,046            |       | —                     |       | —                           |       | —                          |       | 14,046           |       |
| Accrued expenses                                                              |       | —            |       | 144,407                    |       | 179,413                          |       | (42,700                         | )          | 281,120          |       |
| Deferred income taxes                                                         |       | 3,371             |       | 27,612                     |       | —                           |       | (5,768                          | )          | 25,215           |       |
| Current  maturities of long-term debt and obligations under capital leases    |       | 3,474             |       | —                     |       | —                           |       | —                          |       | 3,474            |       |
| Total Current  Liabilities                                                    |       | 253,754           |       | 172,028                    |       | 179,413                          |       | (48,468                         | )          | 556,727          |       |
| Long-term debt  and obligations under capital leases, less current maturities |       | 556,910           |       | 66,851                     |       | —                           |       | —                          |       | 623,761          |       |
| Other long-term  liabilities                                                  |       | 56,929            |       | 29,834                     |       | —                           |       | (20,424                         | )          | 66,339           |       |
| Intercompany  liabilities                                                     |       | 901,585           |       | —                     |       | —                           |       | (901,585                        | )          | —           |       |
| Stockholders’  Equity:                                                   |       |              |       |                       |       |                             |       |                            |       |             |       |
| Common stock                                                                  |       | 68,557            |       | 1,502                      |       | 100                              |       | (1,602                          | )          | 68,557           |       |
| Additional  paid-in capital                                                   |       | 292,836           |       | 436,858                    |       | 3,900                            |       | (440,757                        | )          | 292,837          |       |
| Retained earnings                                                             |       | 422,301           |       | 2,507,532                  |       | 11,804                           |       | (2,478,880                      | )          | 462,757          |       |
| Accumulated  other comprehensive loss                                         |       | (9,906            | )          | —                     |       | —                           |       | —                          |       | (9,906           | )          |
| Less:                                                                         |       |              |       |                       |       |                             |       |                            |       |             |       |
| Cost of shares in treasury                                                    |       | 233,516           |       | —                     |       | —                           |       | —                          |       | 233,516          |       |
| Cost of shares in benefits trust                                              |       | 59,264            |       | —                     |       | —                           |       | —                          |       | 59,264           |       |
| Total  Stockholders’ Equity                                              |       | 481,008           |       | 2,945,892                  |       | 15,804                           |       | (2,921,239                      | )          | 521,465          |       |
| Total Liabilities and  Stockholders’ Equity                              |       | $                 | 2,250,186  |                       | $          | 3,214,605                        |       | $                               | 195,217    |             | $          | (3,891,716 | ) | $ | 1,768,292 |   |

 

10

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CONDENSED CONSOLIDATINGBALANCE SHEET(dollars in thousands)(unaudited)
| **As of February 3, 2007**                                | ** ** | **Pep Boys** | ** ** | **Subsidiary  Guarantors** | ** ** | **Subsidiary  Non-  Guarantors** | ** ** | **Consolidation/  Elimination** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------------------------------|------------|-------------------|------------|----------------------------|------------|----------------------------------|------------|---------------------------------|------------|------------------|------------|
| **ASSETS**                                                                    |       |              |       |                       |       |                             |       |                            |       |             |       |
| Current Assets:                                                               |       |              |       |                       |       |                             |       |                            |       |             |       |
| Cash and cash  equivalents                                                    |       | $                 | 13,581     |                       | $          | 7,946                            |       | $                               | 357        |             | $          | — |   | $ | 21,884 |   |
| Accounts  receivable, net                                                     |       | 17,377            |       | 12,205                     |       | —                           |       | —                          |       | 29,582           |       |
| Merchandise  inventories                                                      |       | 211,445           |       | 395,597                    |       | —                           |       | —                          |       | 607,042          |       |
| Prepaid expenses                                                              |       | 24,511            |       | 13,469                     |       | 20,044                           |       | (18,760                         | )          | 39,264           |       |
| Other                                                                         |       | —            |       | 2,255                      |       | 75,038                           |       | (6,925                          | )          | 70,368           |       |
| Total Current  Assets                                                         |       | 266,914           |       | 431,472                    |       | 95,439                           |       | (25,685                         | )          | 768,140          |       |
| Property and  Equipment—at cost:                                         |       |              |       |                       |       |                             |       |                            |       |             |       |
| Land                                                                          |       | 78,507            |       | 166,767                    |       | 12,893                           |       | (6,462                          | )          | 251,705          |       |
| Buildings and  improvements                                                   |       | 310,952           |       | 607,948                    |       | 20,937                           |       | (10,612                         | )          | 929,225          |       |
| Furniture, fixtures  and equipment                                            |       | 289,005           |       | 395,037                    |       | —                           |       | —                          |       | 684,042          |       |
| Construction in  progress                                                     |       | 2,654             |       | 810                        |       | —                           |       | —                          |       | 3,464            |       |
|                                                                          |       | 681,118           |       | 1,170,562                  |       | 33,830                           |       | (17,074                         | )          | 1,868,436        |       |
| Less accumulated  depreciation and amortization                               |       | 382,363           |       | 576,186                    |       | 239                              |       | 3,401                           |       | 962,189          |       |
| Total Property  and Equipment—Net                                        |       | 298,755           |       | 594,376                    |       | 33,591                           |       | (20,475                         | )          | 906,247          |       |
| Investment in  subsidiaries                                                   |       | 1,567,674         |       | 1,384,492                  |       | —                           |       | (2,952,166                      | )          | —           |       |
| Intercompany  receivable                                                      |       | —            |       | 726,297                    |       | 81,160                           |       | (807,457                        | )          | —           |       |
| Deferred income  taxes                                                        |       | 24,828            |       | —                     |       | —                           |       | —                          |       | 24,828           |       |
| Other                                                                         |       | 63,843            |       | 4,141                      |       | —                           |       | —                          |       | 67,984           |       |
| Total Assets                                                                  |       | $                 | 2,222,014  |                       | $          | 3,140,778                        |       | $                               | 210,190    |             | $          | (3,805,783 | ) | $ | 1,767,199 |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                 |       |              |       |                       |       |                             |       |
| Current  Liabilities:                                                         |       |              |       |                       |       |                             |       |                            |       |             |       |
| Accounts payable                                                              |       | $                 | 265,480    |                       | $          | 9                                |       | $                               | —     |             | $          | — |   | $ | 265,489 |   |
| Trade payable  program liability                                              |       | 13,990            |       | —                     |       | —                           |       | —                          |       | 13,990           |       |
| Accrued expenses                                                              |       | 22,512            |       | 136,073                    |       | 195,321                          |       | (61,626                         | )          | 292,280          |       |
| Deferred income taxes                                                         |       | 6,344             |       | 28,724                     |       | —                           |       | (6,137                          | )          | 28,931           |       |
| Current  maturities of long-term debt and obligations under capital leases    |       | 3,490             |       | —                     |       | —                           |       | —                          |       | 3,490            |       |
| Total Current  Liabilities                                                    |       | 311,816           |       | 164,806                    |       | 195,321                          |       | (67,763                         | )          | 604,180          |       |
| Long-term debt  and obligations under capital leases, less current maturities |       | 523,735           |       | 11,296                     |       | —                           |       | —                          |       | 535,031          |       |
| Other long-term  liabilities                                                  |       | 32,855            |       | 27,378                     |       | —                           |       | —                          |       | 60,233           |       |
| Intercompany  liabilities                                                     |       | 807,457           |       | —                     |       | —                           |       | (807,457                        | )          | —           |       |
| Stockholders’  Equity:                                                   |       |              |       |                       |       |                             |       |                            |       |             |       |
| Common stock                                                                  |       | 68,557            |       | 1,502                      |       | 100                              |       | (1,602                          | )          | 68,557           |       |
| Additional  paid-in capital                                                   |       | 289,384           |       | 436,857                    |       | 3,900                            |       | (440,757                        | )          | 289,384          |       |
| Retained  earnings                                                            |       | 442,193           |       | 2,498,939                  |       | 10,869                           |       | (2,488,204                      | )          | 463,797          |       |
| Accumulated  other comprehensive loss                                         |       | (9,380            | )          | —                     |       | —                           |       | —                          |       | (9,380           | )          |
| Less:                                                                         |       |              |       |                       |       |                             |       |                            |       |             |       |
| Cost of shares in treasury                                                    |       | 185,339           |       | —                     |       | —                           |       | —                          |       | 185,339          |       |
| Cost of shares in benefits trust                                              |       | 59,264            |       | —                     |       | —                           |       | —                          |       | 59,264           |       |
| Total Stockholders’  Equity                                              |       | 546,151           |       | 2,937,298                  |       | 14,869                           |       | (2,930,563                      | )          | 567,755          |       |
| Total Liabilities and  Stockholders’ Equity                              |       | $                 | 2,222,014  |                       | $          | 3,140,778                        |       | $                               | 210,190    |             | $          | (3,805,783 | ) | $ | 1,767,199 |   |

 

11

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CONDENSED CONSOLIDATINGSTATEMENT OF OPERATIONS(dollars in thousands)(unaudited)
| **Thirteen weeks ended May 5, 2007**   | ** ** | **Pep Boys** | ** ** | **Subsidiary  Guarantors** | ** ** | **Subsidiary  Non-  Guarantors** | ** ** | **Consolidation/  Elimination** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------------------------|------------|-------------------|------------|----------------------------|------------|----------------------------------|------------|---------------------------------|------------|------------------|------------|
| Merchandise Sales                                               |       | $                 | 154,284    |                       | $          | 290,751                          |       | $                               | —     |             | $          | — |   | $ | 445,035 |   |
| Service Revenue                                                 |       | 35,612            |       | 65,366                     |       | —                           |       | —                          |       | 100,978          |       |
| Other Revenue                                                   |       | —            |       | —                     |       | 6,260                            |       | (6,260                          | )          | —           |       |
| Total Revenues                                                  |       | 189,896           |       | 356,117                    |       | 6,260                            |       | (6,260                          | )          | 546,013          |       |
| Costs of Merchandise  Sales                                     |       | 109,481           |       | 205,829                    |       | —                           |       | —                          |       | 315,310          |       |
| Costs of Service  Revenue                                       |       | 30,215            |       | 58,696                     |       | —                           |       | —                          |       | 88,911           |       |
| Costs of Other Revenue                                          |       | —            |       | —                     |       | 5,566                            |       | (5,566                          | )          | —           |       |
| Total Costs of Revenues                                         |       | 139,696           |       | 264,525                    |       | 5,566                            |       | (5,566                          | )          | 404,221          |       |
| Gross Profit from  Merchandise Sales                            |       | 44,803            |       | 84,922                     |       | —                           |       | —                          |       | 129,725          |       |
| Gross Profit from  Service Revenue                              |       | 5,397             |       | 6,670                      |       | —                           |       | —                          |       | 12,067           |       |
| Gross Profit from Other  Revenue                                |       | —            |       | —                     |       | 694                              |       | (694                            | )          | —           |       |
| Total Gross Profit                                              |       | 50,200            |       | 91,592                     |       | 694                              |       | (694                            | )          | 141,792          |       |
| Selling, General and  Administrative Expenses                   |       | 42,297            |       | 86,621                     |       | 86                               |       | (932                            | )          | 128,072          |       |
| Net Gain (Loss) from  Dispositions of Assets                    |       | 2,367             |       | (8                         | )          | —                           |       | —                          |       | 2,359            |       |
| Operating Profit                                                |       | 10,270            |       | 4,963                      |       | 608                              |       | 238                             |       | 16,079           |       |
| Non-Operating (Expense)  Income                                 |       | (3,901            | )          | 33,719                     |       | 640                              |       | (28,553                         | )          | 1,905            |       |
| Interest Expense  (Income)                                      |       | 31,913            |       | 10,383                     |       | (1,325                           | )          | (28,315                         | )          | 12,656           |       |
| (Loss) Earnings from  Continuing Operations Before Income Taxes |       | (25,544           | )          | 28,299                     |       | 2,573                            |       | —                          |       | 5,328            |       |
| Income Tax (Benefit)  Expense                                   |       | (18,619           | )          | 19,706                     |       | 1,021                            |       |                            |       | 2,108            |       |
| Equity in Earnings of  Subsidiaries                             |       | 10,145            |       | 18,849                     |       | —                           |       | (28,994                         | )          | —           |       |
| Net Earnings from  Continuing Operations                        |       | 3,220             |       | 27,442                     |       | 1,552                            |       | (28,994                         | )          | 3,220            |       |
| Loss From Discontinued  Operations, Net of Tax                  |       | (45               | )          | —                     |       | —                           |       | —                          |       | (45              | )          |
| **Net Earnings**                                                | ** ** | **$**             | **3,175**  | ** **                 | **$**      | **27,442**                       | ** ** | **$**                           | **1,552**  | ** **       | **$**      | **(28,994** | **)** | **$** | **3,175** | ** ** |

 
| **Thirteen weeks ended April 29, 2006**                                                         | ** ** | **Pep Boys** | ** ** | **Subsidiary  Guarantors** | ** ** | **Subsidiary  Non-  Guarantors** | ** ** | **Consolidation/  Elimination** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|----------------------------|------------|----------------------------------|------------|---------------------------------|------------|------------------|------------|
| Merchandise Sales                                                                                                        |       | $                 | 159,704    |                       | $          | 297,611                          |       | $                               | —     |             | $          | — |   | $ | 457,315 |   |
| Service Revenue                                                                                                          |       | 34,867            |       | 64,419                     |       | —                           |       | —                          |       | 99,286           |       |
| Other Revenue                                                                                                            |       | —            |       | —                     |       | 7,137                            |       | (7,137                          | )          | —           |       |
| Total Revenues                                                                                                           |       | 194,571           |       | 362,030                    |       | 7,137                            |       | (7,137                          | )          | 556,601          |       |
| Costs of  Merchandise Sales                                                                                              |       | 114,460           |       | 215,088                    |       | —                           |       | —                          |       | 329,548          |       |
| Costs of Service  Revenue                                                                                                |       | 30,568            |       | 57,607                     |       | —                           |       | —                          |       | 88,175           |       |
| Costs of Other  Revenue                                                                                                  |       | —            |       | —                     |       | 8,608                            |       | (8,608                          | )          | —           |       |
| Total Costs of  Revenues                                                                                                 |       | 145,028           |       | 272,695                    |       | 8,608                            |       | (8,608                          | )          | 417,723          |       |
| Gross Profit  from Merchandise Sales                                                                                     |       | 45,244            |       | 82,523                     |       | —                           |       | —                          |       | 127,767          |       |
| Gross Profit  from Service Revenue                                                                                       |       | 4,299             |       | 6,812                      |       | —                           |       | —                          |       | 11,111           |       |
| Gross Loss from  Other Revenue                                                                                           |       | —            |       | —                     |       | (1,471                           | )          | 1,471                           |       | —           |       |
| Total Gross  Profit (Loss)                                                                                               |       | 49,543            |       | 89,335                     |       | (1,471                           | )          | 1,471                           |       | 138,878          |       |
| Selling, General  and Administrative Expenses                                                                            |       | 43,016            |       | 86,653                     |       | 81                               |       | 1,471                           |       | 131,221          |       |
| Net Loss from  Dispositions of Assets                                                                                    |       | —            |       | (415                       | )          | —                           |       | —                          |       | (415             | )          |
| Operating Profit  (Loss)                                                                                                 |       | 6,527             |       | 2,267                      |       | (1,552                           | )          | —                          |       | 7,242            |       |
| Non-Operating  (Expense) Income                                                                                          |       | (4,675            | )          | 27,916                     |       | 298                              |       | (21,280                         | )          | 2,259            |       |
| Interest Expense  (Income)                                                                                               |       | 24,961            |       | 7,844                      |       | (1,188                           | )          | (21,280                         | )          | 10,337           |       |
| (Loss) Earnings  from Continuing Operations Before Income Taxes and Cumulative Effect of  Change in Accounting Principle |       | (23,109           | )          | 22,339                     |       | (66                              | )          | —                          |       | (836             | )          |
| Income Tax (Benefit)  Expense                                                                                            |       | (120              | )          | 151                        |       | —                           |       |                            |       | 31               |       |
| Equity in  Earnings of Subsidiaries                                                                                      |       | 22,024            |       | 33,026                     |       | —                           |       | (55,050                         | )          | —           |       |
| Net (Loss)  Earnings from Continuing Operations Before Cumulative Effect of Change in  Accounting Principle              |       | (965              | )          | 55,214                     |       | (66                              | )          | (55,050                         | )          | (867             | )          |
| Loss From  Discontinued Operations, Net of Tax                                                                           |       | (5                | )          | (98                        | )          | —                           |       | —                          |       | (103             | )          |
| Cumulative  Effect of Change in Accounting Principle, Net of Tax                                                         |       | 267               |       | —                     |       | —                           |       | —                          |       | 267              |       |
| Net (Loss) Earnings                                                                                                      |       | $                 | (703       | )                          | $          | 55,116                           |       | $                               | (66        | )                | $          | (55,050 | ) | $ | (703 | ) |

 

12

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CONDENSED CONSOLIDATINGSTATEMENT OF CASH FLOWS(dollars in thousands)(unaudited)
| **Thirteen weeks ended May 5, 2007**                                    | ** ** | **Pep Boys** | ** ** | **Subsidiary  Guarantors** | ** ** | **Subsidiary  Non-  Guarantors** | ** ** | **Consolidation  Elimination** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|-------------------|------------|----------------------------|------------|----------------------------------|------------|--------------------------------|------------|------------------|------------|
| Cash Flows from  Operating Activities:                                                           |       |              |       |                       |       |                             |       |                           |       |             |       |
| Net Earnings                                                                                     |       | $                 | 3,175      |                       | $          | 27,442                           |       | $                              | 1,552      |             | $          | (28,994 | ) | $ | 3,175 |   |
| Adjustments to  Reconcile Net Earnings to Net Cash (Used in) Provided By Continuing  Operations: |       | (1,962            | )          | (3,019                     | )          | 539                              |       | 28,943                         |       | 24,501           |       |
| Changes in operating  assets and liabilities:                                                    |       | (71,707           | )          | 37,342                     |       | (1,079                           | )          | 51                             |       | (35,393          | )          |
| Net cash (used in)  provided by continuing operations                                            |       | (70,494           | )          | 61,765                     |       | 1,012                            |       | —                         |       | (7,717           | )          |
| Net cash used in  discontinued operations                                                        |       | (90               | )          | —                     |       | —                           |       | —                         |       | (90              | )          |
| Net Cash (Used in)  Provided by Operating Activities                                             |       | (70,584           | )          | 61,765                     |       | 1,012                            |       | —                         |       | (7,807           | )          |
|                                                                                             |       |              |       |                       |       |                             |       |                           |       |             |       |
| Net Cash Used in  Investing Activities                                                           |       | (1,758            | )          | (9,852                     | )          | —                           |       | —                         |       | (11,610          | )          |
|                                                                                             |       |              |       |                       |       |                             |       |                           |       |             |       |
| Net Cash Provided by  (Used in) Financing Activities                                             |       | 72,747            |       | (46,887                    | )          | 2,454                            |       | —                         |       | 28,314           |       |
|                                                                                             |       |              |       |                       |       |                             |       |                           |       |             |       |
| Net Increase in Cash  and Cash Equivalents                                                       |       | 405               |       | 5,026                      |       | 3,466                            |       | —                         |       | 8,897            |       |
| Cash and Cash  Equivalents at Beginning of Year                                                  |       | 13,581            |       | 7,946                      |       | 357                              |       | —                         |       | 21,884           |       |
| Cash and Cash Equivalents at End of Year                                                         |       | $                 | 13,986     |                       | $          | 12,972                           |       | $                              | 3,823      |             | $          | — |   | $ | 30,781 |   |

 
| **Thirteen weeks ended April 29, 2006**                                       | ** ** | **Pep Boys** | ** ** | **Subsidiary  Guarantors** | ** ** | **Subsidiary  Non-  Guarantors** | ** ** | **Consolidation /  Elimination** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|-------------------|------------|----------------------------|------------|----------------------------------|------------|---------------------------------------|------------|------------------|------------|
| Cash Flows from  Operating Activities:                                                                 |       |              |       |                       |       |                             |       |                                  |       |             |       |
| Net (Loss) Earnings                                                                                    |       | $                 | (703       | )                          | $          | 55,116                           |       | $                                     | (66        | )                | $          | (55,050 | ) | $ | (703 | ) |
| Adjustments to Reconcile  Net (Loss) Earnings to Net Cash (Used in) Provided By Continuing Operations: |       | (13,311           | )          | (20,110                    | )          | 62                               |       | 55,050                                |       | 21,691           |       |
| Changes in operating  assets and liabilities:                                                          |       | 1,301             |       | (477                       | )          | (4,873                           | )          | —                                |       | (4,049           | )          |
| Net cash (used in)  provided by continuing operations                                                  |       | (12,713           | )          | 34,529                     |       | (4,877                           | )          | —                                |       | 16,939           |       |
| Net cash used in  discontinued operations                                                              |       | (46               | )          | (119                       | )          | —                           |       | —                                |       | (165             | )          |
| Net Cash (Used in)  Provided by Operating Activities                                                   |       | (12,759           | )          | 34,410                     |       | (4,877                           | )          | —                                |       | 16,774           |       |
|                                                                                                   |       |              |       |                       |       |                             |       |                                  |       |             |       |
| Net Cash Used in  Investing Activities                                                                 |       | (373              | )          | (5,120                     | )          | —                           |       | —                                |       | (5,493           | )          |
|                                                                                                   |       |              |       |                       |       |                             |       |                                  |       |             |       |
| Net Cash Provided by  (Used in) Financing Activities                                                   |       | 14,123            |       | (28,761                    | )          | 6,774                            |       | —                                |       | (7,864           | )          |
|                                                                                                   |       |              |       |                       |       |                             |       |                                  |       |             |       |
| Net Increase in Cash  and Cash Equivalents                                                             |       | 991               |       | 529                        |       | 1,897                            |       | —                                |       | 3,417            |       |
| Cash and Cash  Equivalents at Beginning of Year                                                        |       | 12,019            |       | 6,953                      |       | 29,309                           |       | —                                |       | 48,281           |       |
| Cash and Cash Equivalents at End of Year                                                               |       | $                 | 13,010     |                       | $          | 7,482                            |       | $                                     | 31,206     |             | $          | — |   | $ | 51,698 |   |

 

13

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NOTE 11. Contingencies

During the fourth quarter of 2006 and firstquarter of 2007, the Company was served with four separate lawsuits brought byformer associates employed in California, each of which lawsuits purports to bea class action on behalf of all current and former California storeassociates.  One or more of the lawsuitsclaim that the plaintiff was not paid for (i) overtime, (ii) accrued vacationtime, (iii) all time worked (i.e. “off the clock” work) and/or (iv) late ormissed meal periods or rest breaks.   Theplaintiffs also allege that the Company violated certain record keepingrequirements arising out of the foregoing alleged violations.  The lawsuits (i) claim these allegedpractices are unfair business practices, (ii) request back pay, restitution,penalties, interest and attorney fees and (iii) request that the Company beenjoined from committing further unfair business practices. The Companybelieves that it has meritorious defenses to all of these claims and intends todefend these claims vigorously. The resolution of these claims cannot bepredicted and there is no reasonable estimate of the amount or range potentialloss.  Accordingly, the Company has notrecorded any provision for loss associated with these claims.  However, an adverse determination of theseclaims could have a material effect on the Company’s results of operations andcash flows in the period(s) during which they are determined.

The Company is also party to various actions andclaims arising in the normal course of business. The Company believes thatamounts accrued for awards or assessments in connection with such matters areadequate and that the ultimate resolution of these matters will not have amaterial adverse effect on the Company’s financial position, results ofoperations or cash flows.

NOTE 12. Stockholders’ Equity

Following are the components of comprehensiveearnings (loss):

|                                                  | ** ** | **Thirteen weeks ended** | ** ** |
|--------------------------------------------------|------------|------------------------------------|------------|
| ** **                                       | ** ** | **May 5,**                    | ** ** | **April 29,** | ** ** |
| **(dollar amounts in thousands)** | ** ** | **2007**                           | ** ** | **2006** | ** ** |
|                                             |       |                               |       |   |   |
| Net earning  (loss)                              |       | $                                  | 3,175      |   | $ | (703 | ) |
|                                             |       |                               |       |   |   |
| Other  comprehensive (loss) income, net of tax:  |       |                               |       |   |   |
|                                             |       |                               |       |   |   |
| Derivative financial instrument adjustments      |       | (916                               | )          | 336 |   |
|                                             |       |                               |       |   |   |
| Comprehensive earnings  (loss)                   |       | $                                  | 2,259      |   | $ | (367 | ) |

 

The components of Accumulated OtherComprehensive Loss are:

|                                                            | ** ** | **May 5,** | ** ** | **February 3,** | ** ** |
|------------------------------------------------------------|------------|-----------------|------------|----------------------|------------|
| **(dollar amounts in thousands)**           | ** ** | **2007**        | ** ** | **2007**             | ** ** |
|                                                       |       |            |       |                 |       |
| Derivative  financial instrument adjustment, net of tax(1) |       | $               | (916       | )                    | $          | — |   |
|                                                       |       |            |       |                 |       |
| Defined benefit  plan adjustment, net of tax               |       | (8,990          | )          | (9,380               | )          |
|                                                       |       |            |       |                 |       |
| Accumulated Other  Comprehensive Loss                      |       | $               | (9,906     | )                    | $          | (9,380 | ) |

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(1) The Company documented that the swap,designated as a cash flow hedge on the $320,000,000 senior secured notes, met the requirements of SFAS No. 133for hedge accounting on April 9, 2007, and prospectively will record theeffective portion of the change in fair value through Accumulated OtherComprehensive Loss.

On September 7, 2006, the Company renewed itsshare repurchase program and reset the authority back to $100,000,000 forrepurchases to be made from time to time in the open market or in privatelynegotiated transactions through September 30, 2007. During the first quarter offiscal 2007, the Company repurchased 2,702,460 share of  Common Stockfor $50,841,000. These shares were placed into the Company’s treasury. TheCompany also disbursed $7,311,000 for 494,800 shares of Common Stockrepurchased during the fourth quarter of 2006.

14

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Item 2. Management’s Discussion and Analysis ofFinancial Condition and Results of Operations

The discussion and analysis below should be readin conjunction with (i) the condensed consolidated interim financial statementsand the notes to such financial statements included elsewhere in this Form10-Qand (ii) the consolidated financial statements and the notes to such financialstatements included in Item 8, “Financial Statements and Supplementary Data” ofour Annual Report on Form10-K for the fiscal year ended February 3, 2007.

OVERVIEW

The Pep Boys - Manny, Moe & Jack is aleader in the automotive aftermarket with 593 stores located throughout 36states and Puerto Rico. All of our stores feature the nationally-recognized PepBoys brand name, established through more than 80 years of providinghigh-quality automotive merchandise and services, and are company-owned,ensuring chain-wide consistency for our customers. We are the only nationalchain offering automotive service, accessories, tires and parts under one roof,positioning us to achieve our goal of becoming the category dominant one-stopshop for automotive maintenance products and services.

For the thirteen weeks ended May 5, 2007, ourcomparable sales (sales generated by locations in operation during the sameperiod) decreased by 2.3% compared to a decrease of 0.9% for the thirteen weeksended April 29, 2006. This decrease in comparable sales was comprised of a3.1% decrease in comparable merchandise sales partially offset by a 1.5%increase in comparable service revenue. Comparable merchandise sales werereduced due to the elimination of commercial delivery in fifty-five locationsand fewer promotional events.

Our net earnings for the first quarter of 2007were $3,175,000 or $3,878,000 higher than the $703,000 loss incurred in thefirst quarter of 2006. This increase in profitability was the result of a focuson more profitable sales (higher gross margin) and expense control initiativesresulting in lower Selling, General and Administrative expenses.

The following discussion explains the materialchanges in our results of operations for the thirteen weeks ended May 5, 2007and the significant developments affecting our financial condition sinceFebruary 3, 2007. We strongly recommend that you read the audited consolidatedfinancial statements and footnotes and Management’s Discussion and Analysis ofFinancial Condition and Results of Operations included in our Annual Report onForm 10-K for the fiscal year ended February 3, 2007.

LIQUIDITY AND CAPITAL RESOURCES — May 5, 2007

Our cash requirements arise principally from thepurchase of inventory, capital expenditures related to existing stores, officesand warehouses and information systems. The primary capital expenditures forthe thirteen weeks ended May 5, 2007 were primarily for store maintenance andimprovements. During the thirteen weeks ended May 5, 2007, we investedapproximately $10,453,000 in property and equipment versus $6,300,000 investedin the first quarter of fiscal 2006. We estimate that capital expendituresrelated to existing stores, warehouses and offices during fiscal 2007 will beapproximately $45,000,000 and $55,000,000, related primarily to the redesign ofour existing stores.

We anticipate that our net cash provided byoperating activities and our existing revolving credit facility will exceed ourprincipal cash requirements for capital expenditures and inventory purchases infiscal 2007. We have no material debt maturities due within the next twelvemonths.

On September 7, 2006, the Company renewed itsshare repurchase program and reset the authority back to $100,000,000 forrepurchases to be made from time to time in the open market or in privatelynegotiated transactions through September 30, 2007. During the first quarter offiscal 2007, the Company repurchased 2,702,460 shares of Common Stock for $50,841,000. These shares wereplaced into the Company’s treasury. The Company also disbursed $7,311,000 for494,800 shares of Common Stock repurchased during the fourth quarter of 2006.

Working Capital increased from $163,960,000 atFebruary 3, 2007 to $226,416,000 at May 5, 2007. At May 5, 2007, we hadstockholders’ equity of $521,465,000 and long-term debt, net of current maturities,of $623,761,000. Our long-term debt was approximately 55% of our totalcapitalization at May 5, 2007 and 49% at February 3, 2007. As of May 5, 2007,we had further undrawn availability under our revolving credit facilitytotaling $107,000,000.

15

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CONTRACTUAL OBLIGATIONS

The following charts represent our totalcontractual obligations and commercial commitments as of May 5, 2007:
| **Contractual Obligations (2)(3)**                | ** ** | ** ** | ** ** | **Due in less** | ** ** | **Due in**         | ** ** | **Due in**         | ** ** | **Due after** | ** ** |
|-------------------------------------------------------------|------------|------------|------------|---------------------------|------------|-------------------------|------------|-------------------------|------------|--------------------|------------|
| **(dollar amounts in thousands)**            | ** ** | **Total**  | ** ** | **than 1 year** | ** ** | **1–3 years** | ** ** | **3–5 years** | ** ** | **5 years**   | ** ** |
| Long-term debt (1)                                          |       | $          | 626,632    |                      | $          | 3,219                   |       | $                       | 113,245    |               | $          | 6,400 |   | $ | 503,768 |   |
| Operating leases                                            |       | 457,563    |       | 62,936                    |       | 97,773                  |       | 83,961                  |       | 212,893            |       |
| Expected scheduled  interest payments on all long-term debt |       | 294,170    |       | 46,975                    |       | 91,774                  |       | 74,623                  |       | 80,798             |       |
| Capital leases                                              |       | 603        |       | 255                       |       | 348                     |       | —                  |       | —             |       |
| Total cash obligations                                      |       | $          | 1,378,968  |                      | $          | 113,385                 |       | $                       | 303,140    |               | $          | 164,984 |   | $ | 797,459 |   |

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(1) Long-term debtincludes current maturities.

(2) The contractualobligations table excludes our defined benefit pension obligation. Future plancontributions are dependent upon actual plan asset returns and interest rates.For the thirteen weeks ended May 5, 2007, the Company contributed $200,000 ofan anticipated $1,000,0000 contribution during fiscal 2007, to itsnon-qualified defined benefit pension plan.

(3) The contractualobligations table excludes the Company’s FIN 48 liabilities of $7,126,000because the Company cannot make a reliable estimate of the timing of cashpayments.

 
| **Commercial Commitments**                  | ** ** | ** ** | ** ** | **Due in less** | ** ** | **Due in**         | ** ** | **Due in**         | ** ** | **Due after** | ** ** |
|--------------------------------------------------|------------|------------|------------|---------------------------|------------|-------------------------|------------|-------------------------|------------|--------------------|------------|
| **(dollar amounts in thousands)** | ** ** | **Total**  | ** ** | **than 1 year** | ** ** | **1–3 years** | ** ** | **3–5 years** | ** ** | **5 years**   | ** ** |
| Import letters of  credit                        |       | $          | 511        |                      | $          | 511                     |       | $                       | —     |               | $          | — |   | $ | — |   |
| Standby letters of  credit                       |       | 55,859     |       | 42,784                    |       | 13,075                  |       | —                  |       | —             |       |
| Surety bonds                                     |       | 10,497     |       | 5,810                     |       | 4,687                   |       | —                  |       | —             |       |
| Purchase obligations  (1)                        |       | 11,513     |       | 11,513                    |       | —                  |       | —                  |       | —             |       |
| Total commercial commitments                     |       | $          | 78,380     |                      | $          | 60,618                  |       | $                       | 17,762     |               | $          | — |   | $ | — |   |

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(1)                                  Ouropen purchase orders are based on current inventory or operational needs andare fulfilled by our vendors within short periods of time. We currently do nothave minimum purchase commitments under our vendor supply agreements andgenerally our open purchase orders (orders that have not been shipped) are notbinding agreements. Those purchase obligations that are in transit from ourvendors at May 5, 2007 are considered to be a contractual obligation.

OTHER CONTRACTUAL OBLIGATIONS

In the first quarter of fiscal 2005, we enteredinto a contractual commitment to purchase approximately $4,800,000 of productsover a six-year period. The commitment for years two through five isapproximately $950,000 per year, while the final year’s commitment isapproximately half that amount. Following year two, we are obligated to pay thevendor a per unit fee if there is a shortfall between our cumulative purchasesduring the two year period and the minimum purchase requirement. For yearsthree through six, we are obligated to pay the vendor a per unit fee for anyannual shortfall. The maximum annual obligation under any shortfall isapproximately $950,000. At May 5, 2007, we expect to meet the cumulativeminimum purchase requirements under this contract.

DISCONTINUED OPERATIONS

In accordance with SFAS No. 144, ourdiscontinued operations continues to reflect the costs associated with thestores remaining from the 33 stores closed on July 31, 2003 as part of ourcorporate restructuring. The remaining reserve balance is not material.

During the second quarter of fiscal 2006, wesold a store that we have leased back and will continue to operate. Due to oursignificant continuing involvement with this store following the sale, wereclassified back into continuing operations, for all periods presented, thisstore’s revenues and costs that had been previously classified intodiscontinued operations during the third quarter of fiscal 2005, in accordancewith SFAS No. 144 and EITF No. 03-13.

16

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RESULTS OF OPERATIONS

The following table presents for the periodsindicated certain items in the consolidated statements of operations as apercentage of total revenues (except as otherwise provided) and the percentagechange in dollar amounts of such items compared to the indicated prior period.
| ** **                                                                                                               | ** ** | ** **                                      | ** ** | ** **                   | ** ** | **Percentage**                | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|------------------------------|------------|-------------------------------|------------|
| ** **                                                                                                               | ** ** | **Percentage of Total Revenues** | ** ** | **Change**                   | ** ** |
| ** **                                                                                                               | ** ** | **May 5, 2007**                       | ** ** | **April 29, 2006** | ** ** | **Fiscal 2007 vs.** | ** ** |
| **Thirteen weeks ended**                                                                                       | ** ** | **(Fiscal 2007)**                          | ** ** | **(Fiscal 2006)**       | ** ** | **Fiscal 2006**          | ** ** |
| Merchandise  Sales                                                                                                       |       | 81.5                                            | %          | 82.2                         | %          | (2.7                          | )%         |
| Service Revenue  (1)                                                                                                     |       | 18.5                                            |       | 17.8                         |       | 1.7                           |       |
| Total Revenues                                                                                                           |       | 100.0                                           |       | 100.0                        |       | (1.9                          | )          |
| Costs of  Merchandise Sales (2)                                                                                          |       | 70.9                                            | (3)        | 72.1                         | (3)        | 4.3                           |       |
| Costs of Service  Revenue (2)                                                                                            |       | 88.0                                            | (3)        | 88.8                         | (3)        | 0.8                           |       |
| Total Costs of  Revenues                                                                                                 |       | 74.0                                            |       | 75.0                         |       | (3.2                          | )          |
| Gross Profit  from Merchandise Sales                                                                                     |       | 29.1                                            | (3)        | 27.9                         | (3)        | 1.5                           |       |
| Gross Profit  from Service Revenue                                                                                       |       | 12.0                                            | (3)        | 11.2                         | (3)        | 8.6                           |       |
| Total Gross  Profit                                                                                                      |       | 26.0                                            |       | 25.0                         |       | 2.1                           |       |
| Selling, General  and Administrative Expenses                                                                            |       | 23.5                                            |       | 23.6                         |       | (2.4                          | )          |
| Net Gain (Loss)  from Dispositions of Assets                                                                             |       | 0.4                                             |       | (0.1                         | )          | 668.4                         |       |
| Operating Profit                                                                                                         |       | 2.9                                             |       | 1.3                          |       | 122.0                         |       |
| Non-operating  Income                                                                                                    |       | 0.3                                             |       | 0.4                          |       | (15.7                         | )          |
| Interest Expense                                                                                                         |       | 2.3                                             |       | 1.9                          |       | 22.4                          |       |
| Earnings (Loss)  from Continuing Operations Before Income Taxes and Cumulative Effect of  Change in Accounting Principle |       | 1.0                                             |       | (0.2                         | )          | 737.3                         |       |
| Income Tax  (Benefit) Expense                                                                                            |       | 39.6                                            | (4)        | (3.7                         | )(4)       | 6,700.0                       |       |
| Net Earnings  (Loss) from Continuing Operations Before Cumulative Effect of Change in  Accounting Principle              |       | 0.6                                             |       | (0.2                         | )          | 471.4                         |       |
| Discontinued  Operations, Net of Tax                                                                                     |       | —                                          |       | —                       |       | 56.3                          |       |
| Cumulative  Effect of Change in Accounting Principle, Net of Tax                                                         |       | —                                          |       | —                       |       | (100.0                        | )          |
| Net Earnings (Loss)                                                                                                      |       | 0.6                                             |       | (0.2                         | )          | 551.6                         |       |

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(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 Earnings (Loss) from Continuing Operations Before Income Taxesand Cumulative Effect of Change in Accounting Principle.

Thirteen Weeks Ended May5, 2007 vs. Thirteen Weeks Ended April 29, 2006

Total revenues for the first quarter decreased1.9% and comparable store revenues decreased 2.3% primarily due to reducedretail and commercial merchandise sales. Comparable merchandise sales decreased3.1%, while comparable service revenue increased 1.5%. Merchandise sales wereaffected by the removal of commercial delivery from fifty-five stores and fewerpromotional sales.

Gross profit from merchandise sales increased asa percentage of merchandise sales, to 29.1% in fiscal 2007 from 27.9% in fiscal2006. This was a 1.5% or $1,958,000 increase from the prior year. Our productmargin improved due to improved acquisition costs, reduced inventory shrinkageand a $1,300,000 gain on the settlement of an inventory insurance claimresulting from Hurricane Katrina. In addition to our improving product margin,our merchandise margin was favorably impacted by reduced warehousing anddistribution costs which was offset slightly by increased rental expense withinour occupancy cost.

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Gross profit from service revenue increased, asa percentage of service revenue to 12.0% in fiscal 2007 from 11.2% in fiscal2006. This was an 8.6% or $956,000 increase from the prior year. This increase,as a percentage of service revenue, was due to reduced depreciation andemployee benefit expenses.

Selling, general and administrative expenses, asa percentage of total revenues, was 23.5% and 23.6% in fiscal 2007 and fiscal2006, respectively. This was a 2.4% or $3,149,000 decrease from the prior year.Fiscal year 2007 reflects a $3,900,000 CEO transition charge and fiscal year2006 reflects a favorable $2,300,000 insurance settlement. Also contributing tothe decrease in selling, general and administrative expense was lower payrolland media expenses.

Net gain (loss) from dispositions of assetsfavorably increased from the prior year, principally from a $2,400,000 gain,recorded in the first quarter of fiscal 2007, for the settlement of an insuranceclaim relating to stores impaired during Hurricane Katrina in 2005.

Interest expense increased $2,319,000 primarilydue to higher incurred interest rates and a $974,000 expense for changes in thefair value of an interest rate swap agreement that exchanges floating ratepayments for a fixed rate on a $200,000,000 notional amount. On April 9, 2007,the Company documented that the swap qualifies for hedge accounting treatmentand prospectively will record the effective portion of the change in fair valuethrough Accumulated Other Comprehensive Loss.

Net earnings of $3,175,000 for the first quarter of fiscal 2007, improved $3,878,000from the prior fiscal year principally from improved margins and lower selling,general and administrative expenses which were partially offset by higherinterest expense and income tax expense.

INDUSTRY COMPARISON

We operate in the U.S. automotive aftermarket,which has two general competitive arenas: Do-It-For-Me (“DIFM”) (service labor,installed merchandise and tires) market and the Do-It-Yourself (“DIY”) (retailmerchandise) market. Generally, the specialized automotive retailers focus oneither the “DIY” or “DIFM” areas of the business. We believe that our operationin both the “DIY” and “DIFM” areas of the business positively differentiates usfrom most of our competitors. Although we manage our store performance at astore level in aggregation, we believe that the following presentation shows arepresentative comparison against competitors within the two sales arenas. Wecompete in the “DIY” area of the business through our retail sales floor andcommercial sales business (Retail Sales). Our Service Center Business (laborand installed merchandise and tires) competes in the “DIFM” area of theindustry.

The following table presents the revenues andgross profit for each area of the business.
| ** **                                       | ** ** | **Thirteen weeks ended** | ** ** |
|--------------------------------------------------|------------|------------------------------------|------------|
| ** **                                       | ** ** | **May 5,**                    | ** ** | **April 29,** | ** ** |
| **(dollar amounts in thousands)** | ** ** | **2007**                           | ** ** | **2006** | ** ** |
|                                             |       |                               |       |   |   |
| Retail Sales (1)                                 |       | $                                  | 314,704    |   | $ | 327,957 |   |
| Service Center  Revenue (2)                      |       | 231,309                            |       | 228,644 |   |
| Total Revenues                                   |       | $                                  | 546,013    |   | $ | 556,601 |   |
|                                             |       |                               |       |   |   |
| Gross Profit  from Retail Sales (3)              |       | $                                  | 89,743     |   | $ | 89,560 |   |
| Gross Profit  from Service Center Revenue (3)    |       | 52,049                             |       | 49,318 |   |
| Total Gross Profit                               |       | $                                  | 141,792    |   | $ | 138,878 |   |

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(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.

NEW ACCOUNTING STANDARDSTO BE ADOPTED

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In September 2006, the FASB issued SFASNo. 157, “Fair Value Measurements” (SFAS No. 157). SFAS No. 157defines the term fair value, establishes a framework for measuring it withingenerally accepted accounting principles and expands disclosures about itsmeasurements. SFAS No. 157 is effective for financial statements issuedfor fiscal years beginning after November 15, 2007. We are currentlyevaluating the impact of SFAS No. 157.

In February 2007, the FASB issued SFASNo. 159, “The Fair Value Option for Financial Assets and FinancialLiabilities.” SFAS No. 159 permits entities to choose to measure manyfinancial instruments and certain other items at fair value. SFAS No. 159is effective for fiscal years beginning after November 15, 2007. We arecurrently evaluating the impact of SFAS No. 159.

In March 2007, the Emerging Issues TaskForce (“EITF”) reached a consensus on issue number 06-10, “Accounting forDeferred Compensation and Postretirement Benefit Aspects of CollateralAssignment Split-Dollar Life Insurance Arrangements”, (“EITF 06-10”). EITF06-10 provides guidance to help companies determine whether a liability for thepostretirement benefit associated with a collateral assignment split-dollarlife insurance arrangement should be recorded in accordance with either SFASNo. 106, “Employers’ Accounting for Postretirement Benefits Other ThanPensions” (if, in substance, a postretirement benefit plan exists), orAccounting Principles Board Opinion No. 12. (if the arrangement is, insubstance, an individual deferred compensation contract). EITF 06-10 alsoprovides guidance on how a company should recognize and measure the asset in acollateral assignment split-dollar life insurance contract. EITF 06-10 iseffective for fiscal years beginning after December 15, 2007, though earlyadoption is permitted. We are currently evaluating the impact of EITF 06-10.

CRITICAL ACCOUNTINGPOLICIES AND ESTIMATES

Management’s Discussion and Analysis ofFinancial Condition and Results of Operations discusses our consolidatedfinancial statements, which have been prepared in accordance with accountingprinciples generally accepted in the United States of America. The preparationof these financial statements requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities and thedisclosure of contingent assets and liabilities at the date of the consolidatedfinancial statements and the reported amounts of revenues and expenses duringthe reporting period. Additionally, the Company estimates its interim productgross margins in accordance with Accounting Principles Bulletin No. 28, “InterimFinancial Reporting”.

On an on-going basis, we evaluate our estimatesand judgments, including those related to customer incentives, product returnsand warranty obligations, bad debts, inventories, income taxes, financingoperations, restructuring costs, retirement benefits, risk participationagreements and contingencies and litigation. We base our estimates andjudgments on historical experience and on various other factors that arebelieved to be reasonable under the circumstances, the results of which formthe basis for making judgments about the carrying values of assets andliabilities that are not readily apparent from other sources. Actual resultsmay differ from these estimates under different assumptions or conditions. Fora detailed discussion of significant accounting policies that may involve ahigher degree of judgment or complexity, refer to “Critical Accounting Policiesand Estimates” as reported in our Form 10-K for the year ended February 3,2007, which disclosures are hereby incorporated by reference.

FORWARD-LOOKINGSTATEMENTS

Certain statements contained herein constitute “forward-looking statements”within the meaning of The Private Securities Litigation Reform Act of 1995. Thewords “guidance,” “expect,” “anticipate,” “estimates,” “forecasts” and similarexpressions are intended to identify such forward-looking statements.Forward-looking statements include management’s expectations regarding futurefinancial performance, automotive aftermarket trends, levels of competition,business development activities, future capital expenditures, financing sourcesand availability and the effects of regulation and litigation. Although webelieve that the expectations reflected in such forward-looking statements arebased on reasonable assumptions, we can give no assurance that our expectationswill be achieved. Our actual results may differ materially from the resultsdiscussed in the forward-looking statements due to factors beyond our control,including the strength of the national and regional economies, retail andcommercial consumers’ ability to spend, the health of the various sectors ofthe automotive 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.

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Item 3. Quantitative and Qualitative DisclosuresAbout Market Risk

The Company’s primary market risk exposure withregard to financial instruments is to changes in interest rates. Pursuant tothe terms of its revolving credit agreement, changes in LIBOR could affect therates at which the Company could borrow funds thereunder. At May 5, 2007, theCompany had borrowings of $107,200,000 under this facility. Additionally, theCompany has a $320,000,000 Senior Secured Term Loan facility that bearsinterest at LIBOR plus 2.0%, and approximately $117,066,000 of real estateoperating leases which vary based on changes in LIBOR.

On June 3, 2003, we entered into an interestrate swap which was designated as a cash flow hedge of the company’s realestate operating lease payments. During the fourth quarter 2006, we removed thedesignation as a cash flow hedge and will record the change in fair valuethrough the operating statement until its termination date on July 1,2008. During the thirteen weeks ended May 5, 2007, a $829,000 expense wasrecorded in cost of merchandise sales for the change in fair value of thisswap.

On November 2, 2006, the Company entered into aninterest rate swap for a notional amount of $200,000,000. The Company hasdesignated the swap a cash flow hedge on the first $200,000,000 of the Company’s$320,000,000 senior secured notes. The interest rate swap converts the variableLIBOR portion of the interest payments to a fixed rate of 5.036% and terminatesin October 2013. The Company, from inception through April 8, 2007, reflectedthe change in fair value in Interest Expense. The Company documented that theswap met the requirements of SFAS No. 133 for hedge accounting on April 9,2007, and prospectively recorded the effective portion of the change in fairvalue through Accumulated Other Comprehensive Loss. During the period fromFebruary 4, 2007 through April 8, 2007, a $974,000 expense was recorded ininterest expense for the change in fair value of this swap.

 As of May5, 2007 and February 3, 2007, the fair value of the interest rate swaps were$2,254,000 ($1,409,000, net of tax) and $5,522,000 ($3,451,000, net oftax).  $1,465,000 ($916,000, net of tax)of the $3,268,000 ($2,042,000, net of tax) a decline in fair value was includedin Accumulated Other Comprehensive Loss on the consolidated balance sheet.

Item 4. Controls and Procedures

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

Our controls and procedures are designed toensure that information required to be disclosed is accumulated andcommunicated to our management, including our principal executive and principalfinancial officers, as appropriate to allow timely decisions regarding requireddisclosure. The Company’s management, with the participation of the Company’schief executive officer and chief financial officer, evaluated theeffectiveness of the Company’s disclosure controls and procedures as of the endof the period covered by this report. Based on that evaluation, the chiefexecutive officer and chief financial officer concluded that ourdisclosure controls and procedures as of the end of the period covered bythis report are functioning effectively to provide reasonable assurance thatthe information required to be disclosed by the Company in reports filed underthe Securities Exchange Act of 1934 is recorded, processed, summarized andreported within the time periods specified in the SEC’s rules and forms.

In connection with the filing of thisForm 10-Q, the Company’s management, with the participation of the Company’schief executive officer and chief financial officer, evaluated theeffectiveness of the Company’s disclosure controls and procedures as of the endof the period covered by this report. Based on that evaluation, the chiefexecutive officer and chief financial officer concluded that our disclosurecontrols and procedures as of the end of the period covered by this report wereeffective as of the end of the period covered by this report.

CHANGES IN INTERNAL CONTROL OVER FINANCIALREPORTING

No change in the Company’s internal control overfinancial reporting occurred during the fiscal quarter covered by this reportthat has materially affected, or is reasonably likely to materially affect, theCompany’s internal control over financial reporting.

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PART II - OTHER INFORMATION

Item 1.  Legal Proceedings

During the fourth quarter of 2006 and the firstquarter of 2007, the Company has served with four separate lawsuits brought byformer associates employed in California, each of which lawsuits purports to bea class action on behalf of all current and former California storeassociates.  One or more of the lawsuitsclaim that the plaintiff was not paid for (i) overtime, (ii) accrued vacationtime, (iii) all time worked (i.e. “off the clock” work) and/or (iv) late ormissed meal periods or rest breaks.   Theplaintiffs also allege that the Company violated certain record keepingrequirements arising out of the foregoing alleged violations.  The lawsuits (i) claim these allegedpractices are unfair business practices, (ii) request back pay, restitution,penalties, interest and attorney fees and (iii) request that the Company beenjoined from committing further unfair business practices. The Companybelieves that it has meritorious defenses to all of these claims and intends todefend these claims vigorously.  However, an adverse determination of these claims could have a materialeffect on the Company’s results of operations in the period(s) during whichthey are determined.

The Company is also party to various actions andclaims arising in the normal course of business. The Company believes thatamounts accrued for awards or assessments in connection with such matters areadequate and that the ultimate resolution of these matters will not have amaterial adverse effect on the Company’s financial position, results ofoperations or cash flows.

Item 1A.  Risk Factors

There have been no changes to the risksdescribed in the Company’s previously filed Annual Report on Form 10-K forthe fiscal year ended February 3, 2007.

Item 2.  Unregistered Sales of EquitySecurities and Use of Proceeds

Company Purchases of Equity Securities

On September 7, 2006, the Company renewed itsshare repurchase program and reset the authority back to $100,000,000 forrepurchases to be made from time to time in the open market or in privatelynegotiated transactions through September 30, 2007. 
| **Fiscal Period**          | ** ** | **Total  Number of  Shares  Purchased** | ** ** | **Average  Price Paid  per Share (1)** | ** ** | **Total Number of  Shares Purchased  as Part of Publicly  Announced Plans  or Programs** | ** ** | **Approximate Dollar  Value of Shares that  May Yet Be Purchased  Under the Plans or  Programs (2)** | ** ** |
|---------------------------------|------------|----------------------------------------------|------------|-------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| February 4 -  March 3, 2007 (3) |       | 544,900                                      |       | $                                                     | 14.80      |                                                                                                                             | $          | 544,900                                                                                                                                                     |       | $ | 91,950,000 |   |
| March 4 - April  7, 2007        |       | 1,378,675                                    |       | $                                                     | 18.38      |                                                                                                                             | 1,378,675  |                                                                                                                                                        | $          | 66,648,000 |   |
| April 8 - May 5,  2007          |       | 1,273,685                                    |       | $                                                     | 19.43      |                                                                                                                             | 1,273,685  |                                                                                                                                                        | $          | 41,945,000 |   |
| Total                           |       | 3,197,260                                    |       | $                                                     | 18.19      |                                                                                                                             | $          | 3,197,260                                                                                                                                                   |       |   |   |

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(1) All repurchasesreferenced in this table were made on the open market at prevailing marketrates plus related expenses under our stock repurchase program.

(2) Excludes expenses.

(3) Includes 494,800shares, with an average price paid of $14.77 or $7,310,565, purchased in fiscalyear 2006 and settled in this period.

Item 3.  Defaults Upon Senior Securities

None.

Item 4.  Submission of Matters to a Vote ofSecurity Holders

None.

Item 5.  Other Information

None.

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Item 6.  Exhibits and Reports onForm 8-K
| (a)

**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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** - Filed herewith

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SIGNATURES

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.
|                           | THE PEP BOYS - MANNY, MOE & JACK |   |   |
|---------------------------|-------------------------------------------|--------|--------|
|                      | (Registrant)                              |
|                      |                                      |
| Date:  June 13, 2007 |                                      | by:    |   | /s/ Harry F. Yanowitz |
|                      |                                      |   |   | Harry F. Yanowitz |
|                      |                                      |   |   | Senior Vice President and |
|                      |                                      |   |   | Chief Financial Officer |
|                      |                                      |   |   |   |
|                           |                                           |        |        |  |  |  |

 

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

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**  Filedherewith

 

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