Table ofContents

 

 

 

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

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**FORM 10-Q**

 

**(Mark One)**

 

**x****      QuarterlyReport Pursuant to Section 13 or 15(d) of the Securities Exchange Actof 1934**

 

**For the quarterly period ended October 30, 2010**

 

**OR**

 

**o****         TransitionReport Pursuant to Section 13 or 15(d) of the Securities Exchange Actof 1934**

 

**For thetransition period from            to           **

 

**CommissionFile No. 1-3381**

 

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

(Exact name of registrant asspecified in its charter)

 

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

 

**215-430-9000**

(Registrant’s telephonenumber, including area code)

 

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

 

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

 

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

 

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

 

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

 

As of  November 26, 2010, there were 52,521,080shares of the registrant’s Common Stock outstanding.

 

 

 

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Table ofContents

 

Index

 
| ** **                          | ** **                                                                                                                                                                | **Page** |
|-------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------|
| PART I - FINANCIAL INFORMATION |                                                                                                                                                                      |
|                                |                                                                                                                                                                      |     |
| Item 1.                             | Condensed Consolidated  Financial Statements (Unaudited)                                                                                                                  |     |
|                                |                                                                                                                                                                      |     |
|                                | Condensed Consolidated  Balance Sheets – October 30, 2010 and January 30, 2010                                                                             | 3        |
|                                |                                                                                                                                                                      |     |
|                                | Condensed Consolidated  Statements of Operations and Changes in Retained Earnings - Thirteen and  Thirty-nine Weeks Ended October 30, 2010 and October 31, 2009 | 4        |
|                                |                                                                                                                                                                      |     |
|                                | Condensed Consolidated  Statements of Cash Flows – Thirty-nine Weeks Ended October 30, 2010 and  October 31, 2009                                          | 5        |
|                                |                                                                                                                                                                      |     |
|                                | Notes to the  Condensed Consolidated Financial Statements                                                                                                                 | 6        |
|                                |                                                                                                                                                                      |     |
| Item 2.                             | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                                               | 20       |
|                                |                                                                                                                                                                      |     |
| Item 3.                             | Quantitative  and Qualitative Disclosures About Market Risk                                                                                                               | 27       |
|                                |                                                                                                                                                                      |     |
| Item 4.                             | Controls and Procedures                                                                                                                                                   | 28       |
|                                |                                                                                                                                                                      |     |
| Item 5.                             | Other Information                                                                                                                                                         | 28       |
|                                |                                                                                                                                                                      |     |
| PART II - OTHER INFORMATION    | 28                                                                                                                                                                        |
|                                |                                                                                                                                                                      |     |
| Item 1.                             | Legal Proceedings                                                                                                                                                         | 28       |
|                                |                                                                                                                                                                      |     |
| Item 1A.                            | Risk Factors                                                                                                                                                              | 29       |
|                                |                                                                                                                                                                      |     |
| Item 2.                             | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                                                              | 29       |
|                                |                                                                                                                                                                      |     |
| Item 3.                             | Defaults Upon  Senior Securities                                                                                                                                          | 29       |
|                                |                                                                                                                                                                      |     |
| Item 4.                             | (Removed and Reserved)                                                                                                                                                    | 29       |
|                                |                                                                                                                                                                      |     |
| Item 5.                             | Other Information                                                                                                                                                         | 29       |
|                                |                                                                                                                                                                      |     |
| Item 6.                             | Exhibits                                                                                                                                                                  | 30       |
|                                |                                                                                                                                                                      |     |
| SIGNATURES                          | 31                                                                                                                                                                        |
|                                |                                                                                                                                                                      |     |
| INDEX TO EXHIBITS                   | 32                                                                                                                                                                        |

 

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PART I - FINANCIALINFORMATION

 

Item 1. Condensed ConsolidatedFinancial Statements (Unaudited)

 

THE PEP BOYS - MANNY,MOE & JACK AND SUBSIDIARIES

CONDENSEDCONSOLIDATED BALANCE SHEETS

(dollar amounts in thousands,except share data)

UNAUDITED

 
| ** **                                                                                     | ** ** | **October 30, 2010** | ** ** | **January 30, 2010** | ** ** |
|------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|--------------------------------|------------|
| **ASSETS**                                                                                     |       |                           |       |                           |       |
| Current assets:                                                                                |       |                           |       |                           |       |
| Cash and cash equivalents                                                                      |       | $                              | 107,253    |                           | $          | 39,326 |   |
| Accounts receivable, less allowance for  uncollectible accounts of $1,593 and $1,488           |       | 20,469                         |       | 22,983                         |       |
| Merchandise inventories                                                                        |       | 568,592                        |       | 559,118                        |       |
| Prepaid expenses                                                                               |       | 16,647                         |       | 24,784                         |       |
| Other current assets                                                                           |       | 48,350                         |       | 65,428                         |       |
| Assets held for disposal                                                                       |       | 1,378                          |       | 4,438                          |       |
| Total current assets                                                                           |       | 762,689                        |       | 716,077                        |       |
|                                                                                           |       |                           |       |                           |       |
| Property and equipment - net                                                                   |       | 691,833                        |       | 706,450                        |       |
| Deferred income taxes                                                                          |       | 54,461                         |       | 58,171                         |       |
| Other long-term assets                                                                         |       | 22,017                         |       | 18,388                         |       |
| Total assets                                                                                   |       | $                              | 1,531,000  |                           | $          | 1,499,086 |   |
|                                                                                           |       |                           |       |                           |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                 |       |                           |       |                           |       |
| Current liabilities:                                                                           |       |                           |       |                           |       |
| Accounts payable                                                                               |       | $                              | 207,838    |                           | $          | 202,974 |   |
| Trade payable program liability                                                                |       | 57,017                         |       | 34,099                         |       |
| Accrued expenses                                                                               |       | 224,262                        |       | 242,416                        |       |
| Deferred income taxes                                                                          |       | 37,461                         |       | 29,984                         |       |
| Current maturities of long-term debt                                                           |       | 1,079                          |       | 1,079                          |       |
| Total current liabilities                                                                      |       | 527,657                        |       | 510,552                        |       |
|                                                                                           |       |                           |       |                           |       |
| Long-term debt less current maturities                                                         |       | 305,392                        |       | 306,201                        |       |
| Other long-term liabilities                                                                    |       | 73,127                         |       | 73,933                         |       |
| Deferred gain from asset sales                                                                 |       | 156,026                        |       | 165,105                        |       |
|                                                                                           |       |                           |       |                           |       |
| Stockholders’ equity:                                                                     |       |                           |       |                           |       |
| Common stock, par value $1 per share: authorized  500,000,000 shares; issued 68,557,041 shares |       | 68,557                         |       | 68,557                         |       |
| Additional paid-in capital                                                                     |       | 294,781                        |       | 293,810                        |       |
| Retained earnings                                                                              |       | 397,100                        |       | 374,836                        |       |
| Accumulated other comprehensive loss                                                           |       | (18,720                        | )          | (17,691                        | )          |
| Less cost of shares in treasury – 16,041,930  shares and 16,164,074 shares                |       | 272,920                        |       | 276,217                        |       |
| Total stockholders’ equity                                                                |       | 468,798                        |       | 443,295                        |       |
| Total liabilities and stockholders’ equity                                                |       | $                              | 1,531,000  |                           | $          | 1,499,086 |   |

 

See notes to condensedconsolidated financial statements.

 

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THE PEP BOYS - MANNY,MOE & JACK AND SUBSIDIARIES

CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS

ANDCHANGES IN RETAINED EARNINGS

(dollar amounts inthousands, except per share amounts)

UNAUDITED

 
| ** **                                                                           | ** ** | **Thirteen weeks ended** | ** ** | **Thirty-nine weeks ended** | ** ** |
|--------------------------------------------------------------------------------------|------------|------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                           | ** ** | **October 30,  2010**         | ** ** | **October 31,  2009**            | ** ** | **October 30,  2010** | ** ** | **October 31,  2009** | ** ** |
| Merchandise sales                                                                    |       | $                                  | 398,368    |                                  | $          | 378,860 |   | $ | 1,213,736 |   | $ | 1,169,108 |   |
| Service revenue                                                                      |       | 97,996                             |       | 93,783                                |       | 297,516 |   | 288,934 |   |
| Total revenues                                                                       |       | 496,364                            |       | 472,643                               |       | 1,511,252 |   | 1,458,042 |   |
| Costs of merchandise sales                                                           |       | 279,690                            |       | 269,604                               |       | 845,848 |   | 826,429 |   |
| Costs of service revenue                                                             |       | 90,818                             |       | 84,770                                |       | 267,452 |   | 255,553 |   |
| Total costs of revenues                                                              |       | 370,508                            |       | 354,374                               |       | 1,113,300 |   | 1,081,982 |   |
| Gross profit from merchandise sales                                                  |       | 118,678                            |       | 109,256                               |       | 367,888 |   | 342,679 |   |
| Gross profit from service revenue                                                    |       | 7,178                              |       | 9,013                                 |       | 30,064 |   | 33,381 |   |
| Total gross profit                                                                   |       | 125,856                            |       | 118,269                               |       | 397,952 |   | 376,060 |   |
| Selling, general and administrative expenses                                         |       | 110,840                            |       | 109,545                               |       | 335,580 |   | 327,080 |   |
| Net gain from dispositions of assets                                                 |       | 109                                |       | 1,332                                 |       | 2,603 |   | 1,319 |   |
| Operating profit                                                                     |       | 15,125                             |       | 10,056                                |       | 64,975 |   | 50,299 |   |
| Non-operating income                                                                 |       | 650                                |       | 724                                   |       | 1,855 |   | 1,666 |   |
| Interest expense                                                                     |       | 6,630                              |       | 6,922                                 |       | 19,881 |   | 15,324 |   |
| Earnings from continuing operations before income  taxes and discontinued operations |       | 9,145                              |       | 3,858                                 |       | 46,949 |   | 36,641 |   |
| Income tax expense                                                                   |       | 3,471                              |       | 1,501                                 |       | 18,316 |   | 15,363 |   |
| Earnings from continuing operations before  discontinued operations                  |       | 5,674                              |       | 2,357                                 |       | 28,633 |   | 21,278 |   |
| Income (loss) from discontinued operations, net of  tax                              |       | 44                                 |       | (233                                  | )          | (367 | ) | (510 | ) |
| Net earnings                                                                         |       | 5,718                              |       | 2,124                                 |       | 28,266 |   | 20,768 |   |
|                                                                                 |       |                               |       |                                  |       |   |   |   |   |
| Retained earnings, beginning of period                                               |       | 393,245                            |       | 373,963                               |       | 374,836 |   | 358,670 |   |
| Cash dividends                                                                       |       | (1,581                             | )          | (1,557                                | )          | (4,741 | ) | (4,709 | ) |
| Dividend reinvested and other                                                        |       | (282                               | )          | (69                                   | )          | (1,261 | ) | (268 | ) |
| Retained earnings, end of period                                                     |       | $                                  | 397,100    |                                  | $          | 374,461 |   | $ | 397,100 |   | $ | 374,461 |   |
|                                                                                 |       |                               |       |                                  |       |   |   |   |   |
| **Basic earnings per share:**                                                        |       |                               |       |                                  |       |   |   |   |   |
| Earnings from continuing operations before  discontinued operations                  |       | $                                  | 0.11       |                                  | $          | 0.05 |   | $ | 0.54 |   | $ | 0.41 |   |
| Loss from discontinued operations, net of tax                                        |       | —                             |       | (0.01                                 | )          | (0.01 | ) | (0.01 | ) |
| Basic earnings per share                                                             |       | $                                  | 0.11       |                                  | $          | 0.04 |   | $ | 0.53 |   | $ | 0.40 |   |
|                                                                                 |       |                               |       |                                  |       |   |   |   |   |
| **Diluted earnings per share:**                                                      |       |                               |       |                                  |       |   |   |   |   |
| Earnings from continuing operations before discontinued  operations                  |       | $                                  | 0.11       |                                  | $          | 0.04 |   | $ | 0.54 |   | $ | 0.40 |   |
| Loss from discontinued operations, net of tax                                        |       | —                             |       | —                                |       | (0.01 | ) | — |   |
| Diluted earnings per share                                                           |       | $                                  | 0.11       |                                  | $          | 0.04 |   | $ | 0.53 |   | $ | 0.40 |   |
|                                                                                 |       |                               |       |                                  |       |   |   |   |   |
| Cash dividends per share                                                             |       | $                                  | 0.03       |                                  | $          | 0.03 |   | $ | 0.09 |   | $ | 0.09 |   |

 

Seenotes to condensed consolidated financial statements.

 

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THE PEP BOYS - MANNY,MOE & JACK AND SUBSIDIARIES

CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS

(dollar amounts inthousands)

UNAUDITED

 
| **Thirty-nine weeks ended**                                                 | ** ** | **October 30, 2010** | ** ** | **October 31, 2009** | ** ** |
|---------------------------------------------------------------------------------------|------------|--------------------------------|------------|--------------------------------|------------|
| ** **                                                                            | ** ** | ** **                     | ** ** | ** **                     | ** ** |
| **Cash flows from operating  activities:**                                            |       |                           |       |                           |       |
| Net earnings                                                                          |       | $                              | 28,266     |                           | $          | 20,768 |   |
| Adjustments to reconcile net earnings to net cash  provided by continuing operations: |       |                           |       |                           |       |
| Loss from discontinued operations, net of tax                                         |       | 367                            |       | 510                            |       |
| Depreciation and amortization                                                         |       | 55,260                         |       | 53,248                         |       |
| Amortization of deferred gain from asset sales                                        |       | (9,451                         | )          | (9,186                         | )          |
| Stock compensation expense                                                            |       | 2,748                          |       | 1,930                          |       |
| Gain on debt retirement                                                               |       | —                         |       | (6,248                         | )          |
| Deferred income taxes                                                                 |       | 11,795                         |       | 7,270                          |       |
| Net gain from disposition of assets                                                   |       | (2,603                         | )          | (1,319                         | )          |
| Loss from asset impairment                                                            |       | 970                            |       | 3,117                          |       |
| Other                                                                                 |       | 52                             |       | 267                            |       |
| Changes in operating assets and liabilities:                                          |       |                           |       |                           |       |
| Decrease in accounts receivable, prepaid expenses  and other                          |       | 29,382                         |       | 33,241                         |       |
| Increase in merchandise inventories                                                   |       | (9,474                         | )          | (5,806                         | )          |
| Increase in accounts payable                                                          |       | 4,864                          |       | 6,455                          |       |
| Decrease in accrued expenses                                                          |       | (17,993                        | )          | (23,922                        | )          |
| (Decrease) increase in other long-term liabilities                                    |       | (2,122                         | )          | 2,230                          |       |
| Net cash provided by continuing operations                                            |       | 92,061                         |       | 82,555                         |       |
| Net cash used in discontinued operations                                              |       | (1,263                         | )          | (594                           | )          |
| Net cash provided by operating activities                                             |       | 90,798                         |       | 81,961                         |       |
|                                                                                  |       |                           |       |                           |       |
| **Cash flows from investing  activities:**                                            |       |                           |       |                           |       |
| Cash paid for property and equipment                                                  |       | (42,976                        | )          | (27,775                        | )          |
| Proceeds from dispositions of assets                                                  |       | 6,713                          |       | 12,093                         |       |
| Acquisition of Florida Tire Inc.                                                      |       | (144                           | )          | (2,610                         | )          |
| Collateral investment                                                                 |       | (5,000                         | )          | —                         |       |
| Other                                                                                 |       | —                         |       | (500                           | )          |
| Net cash used in continuing operations                                                |       | (41,407                        | )          | (18,792                        | )          |
| Net cash provided by discontinued operations                                          |       | 569                            |       | 1,762                          |       |
| Net cash used in investing activities                                                 |       | (40,838                        | )          | (17,030                        | )          |
|                                                                                  |       |                           |       |                           |       |
| **Cash flows from financing  activities:**                                            |       |                           |       |                           |       |
| Borrowings under line of credit agreements                                            |       | 20,482                         |       | 244,011                        |       |
| Payments under line of credit agreements                                              |       | (20,482                        | )          | (267,873                       | )          |
| Borrowings on trade payable program liability                                         |       | 247,346                        |       | 122,914                        |       |
| Payments on trade payable program liability                                           |       | (224,428                       | )          | (128,385                       | )          |
| Debt payments                                                                         |       | (809                           | )          | (11,720                        | )          |
| Dividends paid                                                                        |       | (4,741                         | )          | (4,709                         | )          |
| Other                                                                                 |       | 599                            |       | 342                            |       |
| Net cash provided by (used in) financing  activities                                  |       | 17,967                         |       | (45,420                        | )          |
| Net increase in cash and cash equivalents                                             |       | 67,927                         |       | 19,511                         |       |
| Cash and cash equivalents at beginning of period                                      |       | 39,326                         |       | 21,332                         |       |
| Cash and cash equivalents at end of period                                            |       | $                              | 107,253    |                           | $          | 40,843 |   |
|                                                                                  |       |                           |       |                           |       |
| Supplemental disclosure of cash flow information:                                     |       |                           |       |                           |       |
| Cash paid for income taxes                                                            |       | $                              | 882        |                           | $          | 4,046 |   |
| Cash paid for interest                                                                |       | $                              | 14,412     |                           | $          | 15,492 |   |
| Accrued purchases of property and equipment                                           |       | $                              | 1,280      |                           | $          | 1,575 |   |

 

See notes to condensed consolidated financial statements

 

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THE PEP BOYS - MANNY,MOE & JACK AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS

 

NOTE 1. Basis of Presentation

 

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

 

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

 

The condensed consolidatedfinancial statements presented herein are unaudited. In the opinion ofmanagement, all adjustments necessary to present fairly the financial position,results of operations and cash flows as of October 30, 2010 and for allperiods presented have been made.

 

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

 

NOTE 2. New Accounting Standards

 

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

 

In January 2010, the FASBissued ASU 2010-06 “Fair Value Measurements — Improving Disclosures on FairValue Measurements” (“ASU 2010-06”). This guidance requires new disclosuressurrounding transfers in and out of level 1 or 2 in the fair value hierarchyand also requires that the reconciliation of level 3 inputs includes separatelyreported information on purchases, sales, issuances and settlements. Theincreased disclosures should be reported for each class of assets orliabilities. ASU 2010-06 also clarifies existing disclosures for the level ofdisaggregating, disclosures about valuation techniques and inputs used to determinelevel 2 or 3 fair value measurements and includes conforming amendments to theguidance on employers’ disclosures about postretirement benefit plan assets.ASU 2010-06 was effective for interim and annual reporting periods beginningafter December 15, 2009 except for the disclosures about purchases, sales,issuances or settlements in the roll forward activity for level 3 fair valuemeasurements which are effective for interim and annual periods beginning afterDecember 15, 2010. The adoption of ASU 2010-06 for requirements effective December 15,2009 did not have a material impact on the Company’s consolidated financialstatements. The Company does not believe the adoption of those requirements ofASU 2010-06 which are effective for periods beginning after December 15,2010 will have a material impact on its consolidated financial statements.

 

NOTE 3. Merchandise Inventories

 

Merchandise inventories are valuedat the lower of cost or market. Cost is determined by using the last-in,first-out (“LIFO”) method. An actual valuation of inventory under the LIFOmethod can be made only at the end of each fiscal year based on inventory andcosts at that time. Accordingly, interim LIFO calculations must be based onmanagement’s estimates of expected fiscal year-end inventory levels and costs.If the first-in, first-out (“FIFO”) method of costing inventory had been usedby the Company, inventory would have been $497.4 million and $482.0 million asof October 30, 2010 and January 30, 2010, respectively.

 

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The Company provides for estimatedinventory shrinkage based upon historical levels and the results of its cyclecounting program, and also records adjustments for potentially excess andobsolete inventories based on current inventory levels, the historical analysisof product sales and current market conditions. The nature of the Company’sinventory is such that the risk of obsolescence is minimal and excess inventoryhas historically been returned to the Company’s vendors for credit. The Companyrecords adjustments when less than full credit is expected from a vendor orwhen market is lower than recorded costs. These adjustments are reviewed on aquarterly basis for adequacy. The Company’s inventory adjustments for thesematters were $10.7 million and $13.0 million at October 30, 2010 and January 30,2010, respectively.

 

NOTE 4. Property and Equipment

 

The Company’s property andequipment as of October 30, 2010 and January 30, 2010 was as follows:

 
| **(dollar amounts in thousands)** | ** ** | **October 30, 2010** | ** ** | **January 30, 2010** | ** ** |
|--------------------------------------------------|------------|--------------------------------|------------|--------------------------------|------------|
|                                             |       |                           |       |                           |       |
| Property  and equipment                          |       |                           |       |                           |       |
| Land                                             |       | $                              | 203,838    |                           | $          | 204,709 |   |
| Buildings  and improvements                      |       | 839,058                        |       | 826,804                        |       |
| Furniture,  fixtures and equipment               |       | 698,127                        |       | 695,072                        |       |
| Construction  in progress                        |       | 2,315                          |       | 1,550                          |       |
| Accumulated  depreciation and amortization       |       | (1,051,505                     | )          | (1,021,685                     | )          |
| Property  and equipment – net               |       | $                              | 691,833    |                           | $          | 706,450 |   |

 

NOTE 5. Warranty Reserve

 

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

 

The reserve for warranty costactivity for the thirty-nine weeks ended October 30, 2010 and thefifty-two weeks ended January 30, 2010 is as follows:

 
| **(dollar amounts in thousands)** | ** ** | **October 30,**** ****2010** | ** ** | **January 30, 2010** | ** ** |
|--------------------------------------------------|------------|----------------------------------------|------------|--------------------------------|------------|
| Beginning balance                                |       | $                                      | 694        |                           | $          | 797 |   |
|                                             |       |                                   |       |                           |       |
| Additions related to  current period sales       |       | 9,136                                  |       | 15,572                         |       |
|                                             |       |                                   |       |                           |       |
| Warranty costs incurred in  current period       |       | (9,157                                 | )          | (15,675                        | )          |
|                                             |       |                                   |       |                           |       |
| Ending balance                                   |       | $                                      | 673        |                           | $          | 694 |   |

 

NOTE 6. Debt and FinancingArrangements

 

The following are the components ofdebt and financing arrangements:

 
| **(dollar amounts in thousands)**         | ** ** | **October 30, 2010** | ** ** | **January 30, 2010** | ** ** |
|----------------------------------------------------------|------------|--------------------------------|------------|--------------------------------|------------|
| 7.50% Senior Subordinated Notes, due  December 2014 |       | $                              | 157,565    |                           | $          | 157,565 |   |
| Senior Secured Term Loan, due October 2013          |       | 148,906                        |       | 149,715                        |       |
| Revolving Credit Agreement, expiring  January 2014  |       | —                         |       | —                         |       |
|                                                     |       | 306,471                        |       | 307,280                        |       |
| Less current maturities                                  |       | 1,079                          |       | 1,079                          |       |
| Long-term debt, less current maturities                  |       | $                              | 305,392    |                           | $          | 306,201 |   |

 

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

 

As of October 30, 2010, 126 ofthe Company’s 231 owned stores were used as collateral under the Company’sSenior Secured Term Loan due October 2013.

 

The Company’s ability to borrowunder its $300.0 million Revolving Credit Agreement is based on a specificborrowing base consisting of inventory and accounts receivable. The interest rateon this credit line is LIBOR or Prime plus 2.75% to 3.25% based upon the thencurrent availability under the facility. As of October 30, 2010, therewere no outstanding borrowings under this agreement and $107.9 million ofavailability was utilized to support outstanding letters of credit. Taking thisinto account and the borrowing base requirements, as of October 30, 2010,there was $139.5 million of availability remaining.

 

Several of the Company’s debtagreements require compliance with covenants. The most restrictive of theserequirements is contained in the Company’s Revolving Credit Agreement. Duringany period when the availability under the Revolving Credit Agreement dropsbelow the greater of $50.0 million or 17.5% of the borrowing base, the Companyis required to maintain a consolidated fixed charge coverage ratio of at least1.1:1.0, calculated as the ratio of (a) EBITDA (net income plus interestcharges, provision for taxes, depreciation and amortization expense, non-cashstock compensation expenses and other non-recurring, non-cash items) minuscapital expenditures and income taxes paid to (b) the sum of debt servicecharges and restricted payments made. The failure to satisfy this covenantwould constitute an event of default under the Revolving Credit Agreement,which would result in a cross-default under the Company’s Notes and SeniorSecured Term Loan. As of October 30, 2010, the Company was in compliancewith all such financial covenants.

 

Interest rates that are currentlyavailable to the Company for issuance of debt with similar terms and remainingmaturities are used to estimate fair value for debt issues that are not quotedon an exchange. The estimated fair value of long-term debt including currentmaturities was $301.2 million and $290.8 million as of October 30, 2010and January 30, 2010, respectively.

 

During the third quarter of 2010,the Company invested $5.0 million in a restricted account as collateral for itsretained liabilities included within existing insurance programs in lieu of apreviously outstanding letter of credit. The collateral investment is includedin other long term assets on the condensed consolidated balance sheet.

 

NOTE 7. Sale-Leaseback Transactions

 

During the thirty-nine weeks ended October 30,2010, the Company sold one property to an unrelated third party. Net proceedsfrom this sale were $1.6 million. Concurrent with this sale, the Companyentered into an agreement to lease the property back from the purchaser over aminimum lease term of 15 years. The Company classified this lease as anoperating lease. The Company actively uses this property and considers thelease as a normal leaseback. A deferred gain of $0.4 million is beingrecognized over the minimum term of the lease. No sale leaseback transactionswere completed during the thirteen weeks ended October 30, 2010.

 

During the thirteen and thirty-nineweeks ended October 31, 2009, the Company sold three properties tounrelated third parties. Net proceeds from these sales were $11.0 million.Concurrent with these sales, the Company entered into agreements to lease theproperties back from the purchasers over minimum lease terms of 15 years.The Company classified these leases as operating leases. The Company activelyuses these properties and considers the leases as normal leasebacks. A $1.4million gain on the sale of these properties was recognized immediately uponexecution of the sale and a $6.5 million gain was deferred. The deferred gainis being recognized over the minimum term of these leases.

 

The Company operated 602 storelocations at October 30, 2010, of which 231 were owned and 371 wereleased.

 

NOTE 8. Income Taxes

 

TheCompany recognizes taxes payable for the current year, as well as deferred taxassets and liabilities for the future tax consequences of events that have beenrecognized in the Company’s financial statements or tax returns. The Companymust assess the likelihood that any recorded deferred tax assets will berecovered against future taxable income. To the extent the Company believes itis more likely than not that the asset will not be recoverable, a valuationallowance must be established. All available evidence, both positive andnegative is considered to determine whether based on the weight of thatevidence, a valuation allowance is needed. To

 

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establishthis positive evidence, the Company considers future projections of income andvarious tax planning strategies for generating income sufficient to utilize thedeferred tax assets. Based on its improved profitability, the Company released$2.2 million of valuation allowance relating to certain unitary state netoperating loss carryforwards and credits during the thirty-nine weeks ended October 30,2010.

 

Forincome tax benefits related to uncertain tax positions to be recognized, a taxposition must be more likely than not to be sustained upon examination bytaxing authorities. The amount recognized is measured as the largest amount ofbenefit that is greater than 50 percent likely of being realized upon ultimatesettlement. During the thirteen and thirty-nine weeks ended October 30,2010, the Company did not have a material change to its uncertain tax positionliabilities. During the thirteen weeks ended October 31, 2009, the Companyreduced its uncertain tax position liabilities by approximately $0.6 million,of which $0.2 million was interest, and during the thirty-nine weeks ended October 31,2009, the Company reduced its uncertain tax position liabilities by $1.4million, of which $0.7 million was interest. These reductions related to settlementof previously established liabilities with the applicable taxing authorities.

 

NOTE 9. Accumulated OtherComprehensive Loss

 

The following are the components ofother comprehensive income:

 
| ** **                                       | ** ** | **Thirteen Weeks Ended** | ** ** | **Thirty-nine Weeks Ended** | ** ** |
|--------------------------------------------------|------------|------------------------------------|------------|---------------------------------------|------------|
| **(dollar amounts in thousands)** | ** ** | **October 30,  2010**         | ** ** | **October 31,  2009**            | ** ** | **October 30,  2010** | ** ** | **October 31,  2009** | ** ** |
| Net earnings                                     |       | $                                  | 5,718      |                                  | $          | 2,124 |   | $ | 28,266 |   | $ | 20,768 |   |
| Other comprehensive income (loss), net of tax:   |       |                               |       |                                  |       |   |   |   |   |
| Defined benefit plan adjustment                  |       | 264                                |       | 280                                   |       | 794 |   | 840 |   |
| Derivative financial instrument adjustment       |       | (226                               | )          | (542                                  | )          | (1,823 | ) | 496 |   |
| Comprehensive income                             |       | $                                  | 5,756      |                                  | $          | 1,862 |   | $ | 27,237 |   | $ | 22,104 |   |

 

The components of accumulated othercomprehensive loss are:

 
| **(dollar amounts in thousands)**        | ** ** | **October 30, 2010** | ** ** | **January 30, 2010** | ** ** |
|---------------------------------------------------------|------------|--------------------------------|------------|--------------------------------|------------|
|                                                    |       |                           |       |                           |       |
| Defined benefit plan adjustment, net of tax             |       | $                              | (6,364     | )                              | $          | (7,158 | ) |
| Derivative financial instrument adjustment, net of  tax |       | (12,356                        | )          | (10,533                        | )          |
| Accumulated other comprehensive loss                    |       | $                              | (18,720    | )                              | $          | (17,691 | ) |

 

NOTE 10: Impairments and Assets Held for Disposal

 

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

 

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

 

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

 

During the thirteen week periodended October 30, 2010, the Company sold one store classified as held fordisposal for net proceeds of $0.6 million and recognized a net gain of $0.2million. During the thirteen week period ended October 31, 2009, theCompany did not sell any stores classified as held for disposal. During thethirty-nine week period ended October 30, 2010, the Company sold fivestores classified as held for disposal for net proceeds of $3.5 million andrecognized a net gain of $0.5 million. During the thirty-nine week period endedOctober 31, 2009, the Company sold three stores that were classified asheld for disposal for net proceeds of $2.8 million and recognized a net gain of$0.1 million. In the third quarter of 2009, the Company recorded an impairmentcharge of $3.3 million on the then remaining stores classified as held fordisposal reflecting further declines in the real estate market for vacantproperties. The fair market value of the stores is classified as a Level 2measure within the fair value hierarchy. Of the entire $3.3 million impairment,$2.5 million was charged to cost of merchandise sales, $0.7 million was chargedto cost of service revenues and $0.2 million was charged to discontinuedoperations.

 

Assets held for disposal are as follows:

 
| **(dollar amounts in thousands)** | ** ** | **October 30, 2010** | ** ** | **January 30, 2010** | ** ** |
|--------------------------------------------------|------------|--------------------------------|------------|--------------------------------|------------|
|                                             |       |                           |       |                           |       |
| Land                                             |       | $                              | 949        |                           | $          | 2,980 |   |
| Buildings  and improvements                      |       | 1,870                          |       | 5,453                          |       |
| Accumulated  depreciation and amortization       |       | (1,441                         | )          | (3,995                         | )          |
| Property  and equipment - net                    |       | $                              | 1,378      |                           | $          | 4,438 |   |
| Number  of properties                            |       | 3                              |       | 8                              |       |

 

In addition to the above stores,the Company reached a settlement agreement during the second quarter of 2010 ona previously closed store for $2.8 million, resulting in a net gain from thedisposition of assets of $2.1 million.

 

NOTE 11. Earnings Per Share

 

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

 
| ** **                                                            | ** **                                                                                                                     | **Thirteen Weeks Ended** | ** ** | **Thirty-nine Weeks Ended** | ** ** |
|-----------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------|------------------------------------|------------|---------------------------------------|------------|
| **(in thousands, except per share amounts)** | ** **                                                                                                                     | **October 30,  2010**         | ** ** | **October 31,  2009**            | ** ** | **October 30,  2010** | ** ** | **October 31,  2009** | ** ** |
| * *                                                              | * *                                                                                                                       | * *                           | * *   | * *                              | * *   | * * | * * | * * | * * |
| (a)                                                                   | Earnings from continuing operations                                                                                            |                               | $          | 5,674                                 |       | $ | 2,357 |   | $ | 28,633 |   | $ | 21,278 |   |
|                                                                  |                                                                                                                           |                               |       |                                  |       |   |   |   |   |   |
|                                                                  | Income (loss) from discontinued operations, net of  tax                                                                        |                               | 44         |                                  | (233       | ) | (367 | ) | (510 | ) |
|                                                                  |                                                                                                                           |                               |       |                                  |       |   |   |   |   |   |
|                                                                  | Net earnings                                                                                                                   |                               | $          | 5,718                                 |       | $ | 2,124 |   | $ | 28,266 |   | $ | 20,768 |   |
|                                                                  |                                                                                                                           |                               |       |                                  |       |   |   |   |   |   |
| (b)                                                                   | Basic average number of common shares outstanding  during period                                                               |                               | 52,717     |                                  | 52,419     |   | 52,637 |   | 52,379 |   |
|                                                                  |                                                                                                                           |                               |       |                                  |       |   |   |   |   |   |
|                                                                  | Common shares assumed issued upon exercise of  dilutive stock options, net of assumed repurchase, at the average market  price |                               | 447        |                                  | 367        |   | 434 |   | 242 |   |
|                                                                  |                                                                                                                           |                               |       |                                  |       |   |   |   |   |   |
| (c)                                                                   | Diluted average number of common shares assumed  outstanding during period                                                     |                               | 53,164     |                                  | 52,786     |   | 53,071 |   | 52,621 |   |
|                                                                  |                                                                                                                           |                               |       |                                  |       |   |   |   |   |   |
| ** **                                                            | **Basic earnings per share:**                                                                                                  | ** **                         | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                                  | Earnings from continuing operations (a/b)                                                                                      |                               | $          | 0.11                                  |       | $ | 0.05 |   | $ | 0.54 |   | $ | 0.41 |   |
|                                                                  | Discontinued operations, net of tax                                                                                            |                               | —     |                                  | (0.01      | ) | (0.01 | ) | (0.01 | ) |
|                                                                  | Basic earnings per share                                                                                                       |                               | $          | 0.11                                  |       | $ | 0.04 |   | $ | 0.53 |   | $ | 0.40 |   |
| ** **                                                            | ** **                                                                                                                     | ** **                         | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                                  | **Diluted earnings per share:**                                                                                                |                               |       |                                  |       |   |   |   |   |   |
|                                                                  | Net earnings from continuing operations (a/c)                                                                                  |                               | $          | 0.11                                  |       | $ | 0.04 |   | $ | 0.54 |   | $ | 0.40 |   |
|                                                                  | Discontinued operations, net of tax                                                                                            |                               | —     |                                  | —     |   | (0.01 | ) | — |   |
|                                                                  | Diluted earnings per share                                                                                                     |                               | $          | 0.11                                  |       | $ | 0.04 |   | $ | 0.53 |   | $ | 0.40 |   |

 

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At October 30, 2010 and October 31,2009, respectively, there were 2,321,000 and 1,949,000 outstanding options andrestricted stock units. Certain stock options were excluded from thecalculation of diluted earnings per share because their exercise prices weregreater than the average market price of the common shares for the periods thenended and therefore would be anti-dilutive. The total numbers of such sharesexcluded from the diluted earnings per share calculation are 1,059,000 and901,000 for the thirteen weeks ended October 30, 2010 and October 31,2009, respectively. The total number of such shares excluded from the dilutedearnings per share calculation are 1,078,000 and 1,203,000 for the thirty-nineweeks ended October 30, 2010 and October 31, 2009, respectively.

 

NOTE 12. Benefit Plans

 

The Company has a qualified 401(k) savingsplan and a separate plan for employees residing in Puerto Rico, which cover allfull-time employees who are at least 21 years of age with one or more years ofservice. The Company’s expense related to the savings plans was approximately$0.9 million and $0.6 million for the thirteen weeks ended October 30,2010 and October 31, 2009, respectively and approximately $2.5 million and$2.4 million for the thirty-nine weeks ended October 30, 2010 and October 31,2009, respectively. The Company also maintains a non-qualified definedcontribution Supplemental Executive Retirement Plan (the “Account Plan”) forkey employees designated by the Board of Directors. The Company’s expense forthe Account Plan was approximately $0.3 million and $0.2 million for thethirteen weeks ended October 30, 2010 and October 31, 2009,respectively and approximately $1.0 million and $0.7 million for thethirty-nine weeks ended October 30, 2010 and October 31, 2009,respectively. The Company’s contribution to these plans for fiscal 2010 iscontingent upon meeting certain performance metrics. The Company currentlyestimates that these performance metrics will be achieved and has recordedexpense accordingly.

 

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

 
| ** **                                       | ** ** | **Thirteen Weeks Ended** | ** ** | **Thirty-nine Weeks Ended** | ** ** |
|--------------------------------------------------|------------|------------------------------------|------------|---------------------------------------|------------|
| **(dollar amounts in thousands)** | ** ** | **October 30, 2010**     | ** ** | **October 31, 2009**        | ** ** | **October 30, 2010** | ** ** | **October 31, 2009** | ** ** |
|                                             |       |                               |       |                                  |       |   |   |   |   |
| Interest cost                                    |       | 640                                |       | 635                                   |       | 1,920 |   | 1,904 |   |
| Expected return on plan assets                   |       | (538                               | )          | (451                                  | )          | (1,613 | ) | (1,353 | ) |
| Amortization of prior service cost               |       | —                             |       | 3                                     |       | — |   | 10 |   |
| Amortization of net loss                         |       | 421                                |       | 442                                   |       | 1,264 |   | 1,326 |   |
| Net periodic benefit cost                        |       | $                                  | 523        |                                  | $          | 629 |   | $ | 1,571 |   | $ | 1,887 |   |
|                                                  |            |                                    |            |                                       |            |  |  |  |  |  |  |  |  |

 

The defined benefit pension plan issubject to minimum funding requirements of the Employee Retirement IncomeSecurity Act of 1974 as amended. While the Company has no minimum fundingrequirement during fiscal 2010, it made a $5.0 million discretionarycontribution to the defined benefit pension plan on October 22, 2010.

 

NOTE 13. Equity Compensation Plans

 

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

 

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

 
| ** **                               | ** ** | **Number of Shares** | ** ** |
|------------------------------------------|------------|--------------------------------|------------|
| Outstanding — January 30, 2010 |       | 1,682,325                      |       |
| Granted                                  |       | 303,556                        |       |
| Exercised                                |       | (38,738                        | )          |
| Forfeited                                |       | (26,477                        | )          |
| Expired                                  |       | (29,142                        | )          |
| Outstanding — October 30, 2010 |       | 1,891,524                      |       |

 

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During the thirty-nine weeks ended October 30,2010 and October 31, 2009, the Company granted approximately 303,500 and948,000 stock options with a weighted average grant date fair value of $4.26and $2.10, respectively. These options have a seven year term and vest over athree year period with a third vesting on each of the three grant dateanniversaries. The compensation expense recorded during the thirty-nine weeksended October 30, 2010 for the options granted during fiscal 2010 wasminimal.

 

Of the options granted in fiscalyear 2009, the Company granted 736,000 stock options with a weighted averagegrant date fair value of $1.69. These options have a seven year term andinclude both a service and a market appreciation vesting requirement. Theseoptions vest over a three year period with a third vesting on each of the threegrant date anniversaries, provided the market price of the Company’s stock hasappreciated by a certain amount. From the date of grant, the market price ofthe Company’s stock must have appreciated, for at least 15 consecutive tradingdays, by $2.00 or more above grant price for 536,000 options and by $6.88 ormore above grant price for 200,000 options in order to vest. The Company used aMonte Carlo simulation model to estimate the expected term and is recording thecompensation expense over the service period for each separately vestingportion of the options granted. As of October 30, 2010, the marketappreciation requirements of both grants have been satisfied.

 

Thefair value of each option granted is estimated on the date of grant using theBlack-Scholes option-pricing model, and in certain situations where the grantincludes both a market and service condition as described more fully above,using a Monte Carlo simulation. Expected volatility is based on historicalvolatilities for a time period similar to that of the expected term. Therisk-free rate is based on the U.S. treasury yield curve for issues with aremaining term equal to the expected term.

 

Thefollowing are the weighted-average assumptions:

 
| ** **                        | ** ** | **October 30, 2010** | ** ** | **October 31, 2009** | ** ** |
|-----------------------------------|------------|--------------------------------|------------|--------------------------------|------------|
| Dividend yield                    |       | 1.4                            | %          | 2.3                            | %          |
| Expected volatility               |       | 55.7                           | %          | 65.2                           | %          |
| Risk-free interest rate range:    |       |                           |       |                           |       |
| High                              |       | 2.0                            | %          | 2.3                            | %          |
| Low                               |       | 1.7                            | %          | 1.6                            | %          |
| Ranges of expected lives in years |       | 4 - 5                          |       | 4 - 5                          |       |

 

Restricted Stock Units

 

In the third quarter of fiscal2010, the Company did not grant any restricted stock units.

 

In the second quarter of fiscal2010, the Company granted approximately 52,000 restricted stock units to itsnon-employee directors of the Board that vested immediately. The fair value was$9.55 per unit and the Company recognized compensation expense of approximately$0.5 million for these restricted stock units.

 

In the first quarter of fiscal2010, the Company granted approximately 105,000 restricted stock units thatwill vest if the employees remain continuously employed through the thirdanniversary date of the grant and the Company achieves certain financialtargets for fiscal year 2012. The number of underlying shares that may beissued upon vesting will range from 0% to 150%, depending upon the Companyachieving the financial targets in fiscal year 2012. The fair value for theseawards was $10.34 at the date of the grant. The compensation expense recordedduring the thirty-nine weeks ended October 30, 2010 for these restrictedstock units was minimal.

 

In the first quarter of fiscal2010, the Company also granted approximately 52,000 restricted stock units thatwill vest if the employees remain continuously employed through the thirdanniversary date of the grant and will become exercisable if the Companysatisfies a market condition in fiscal 2012. The number of underlying sharesthat may become exercisable will range from 0% to 175% depending upon whetherthe market condition is achieved. The Company used a Monte Carlo simulation toestimate a $12.99 grant date fair value. The compensation expense recorded duringthe thirty-nine weeks ended October 30, 2010 for these restricted stockunits was minimal.

 

In the first quarter of fiscal2010, the Company granted approximately 61,000 restricted stock units relatedto officer’s deferred bonus match under the Company’s non-qualified deferredcompensation plan, which vest over a three year period. The following table

 

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** **

summarizes the units under theCompany’s plan, assuming maximum vesting of underlying shares for theperformance and market based awards described above:

 
| ** **                             | ** ** | **Number of RSUs** | ** ** |
|----------------------------------------|------------|------------------------------|------------|
| Nonvested — January 30, 2010 |       | 232,593                      |       |
| Granted                                |       | 362,283                      |       |
| Forfeited                              |       | (13,588                      | )          |
| Vested                                 |       | (151,676                     | )          |
| Nonvested — October 30, 2010 |       | 429,612                      |       |

 

NOTE 14. Fair Value Measurementsand Derivatives

 

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

 

Fairvalue is defined as the exit price, or the amount that would be received tosell an asset or paid to transfer a liability in an orderly transaction betweenmarket participants as of the measurement date. There is a hierarchy for inputsused in measuring fair value that maximizes the use of observable inputs andminimizes the use of unobservable inputs by requiring that the most observableinputs be used when available. Observable inputs are inputs market participantswould use in valuing the asset or liability developed based on market data obtainedfrom sources independent of the Company. Unobservable inputs are inputs thatreflect the Company’s assumptions about the factors market participants woulduse in valuing the asset or liability developed based upon the best informationavailable in the circumstances. The hierarchy is broken down into three levels.Level 1 inputs are quoted prices (unadjusted) in active markets for identicalassets or liabilities. Level 2 inputs include quoted prices for similar assetsor liabilities in active markets. Level 3 inputs are unobservable inputs forthe asset or liability. Categorization within the valuation hierarchy is basedupon the lowest level of input that is significant to the fair valuemeasurement.

 

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

 
| **(dollar amounts in thousands)** | ** ** | **Fair Value  at**        | ** ** | **Fair Value Measurements  Using Inputs Considered as** | ** ** |
|--------------------------------------------------|------------|--------------------------------|------------|----------------------------------------------------------------------------------|------------|
| **Description**                                  | ** ** | **October 30, 2010** | ** ** | **Level 1**                                                                 | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
| **Assets:**                                      |       |                           |       |                                                                             |       |   |   |   |   |
| Cash and cash equivalents                        |       | $                              | 107,253    |                                                                             | $          | 107,253 |   |   |   |   |   |
| Collateral investments (a)                       |       | $                              | 5,000      |                                                                             | $          | 5,000 |   |   |   |   |   |
|                                             |       |                           |       |                                                                             |       |   |   |   |   |
| **Liabilities:**                                 |       |                           |       |                                                                             |       |   |   |   |   |
| Current liabilities                              |       |                           |       |                                                                             |       |   |   |   |   |
| Derivative liability (b)                         |       | $                              | 28         |                                                                             |       |   | $ | 28 |   |   |   |
| Contingent consideration (b)                     |       | $                              | 144        |                                                                             |       |   |   |   | $ | 144 |   |
| Other liabilities                                |       |                           |       |                                                                             |       |   |   |   |   |
| Derivative liability (c)                         |       | $                              | 19,388     |                                                                             |       |   | $ | 19,388 |   |   |   |
| Contingent consideration (c)                     |       | $                              | 1,340      |                                                                             |       |   |   |   | $ | 1,340 |   |

 

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(a)          Included inother long-term assets

(b)         included inaccrued liabilities

(c)          included inother long-term liabilities

 

The Company has one interest rateswap designated as a cash flow hedge on $145.0 million of the Company’s SeniorSecured Term Loan that is due in October 2013. The swap is used tominimize interest rate exposure and overall interest costs by converting thevariable component of the total interest rate to a fixed rate of 5.036%. SinceFebruary 1, 2008, this swap was deemed to be fully effective and alladjustments in the interest rate swap’s fair value have been recorded toaccumulated other comprehensive loss.

 

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

 
| **(dollar amounts in thousands)** | ** ** | **Amount of Loss in  Other Comprehensive  Income  (Effective Portion)** | ** ** | **Earnings Statement  Classification** | ** **       | **Amount of Loss  Recognized in Earnings  (Effective Portion) (a)** | ** ** |
|--------------------------------------------------|------------|--------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------------|---------------------------------------------------------------------------------------------------|------------|
| Thirteen weeks ended October 30, 2010       |       | $                                                                                                | (256       | )                                           | Interest expense |                                                                                              | $          | (1,721 | ) |
| Thirty-nine weeks ended October 30, 2010    |       | $                                                                                                | (1,877     | )                                           | Interest expense |                                                                                              | $          | (5,169 | ) |

 

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(a) representsthe effective portion of the loss reclassified from accumulated othercomprehensive loss

 

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

 

Thefair value of the derivatives was $19.4 million and $16.4 million payable at October 30,2010 and January 30, 2010, respectively. Of the $3.0 million increase inthe fair value during the thirty-nine weeks ended October 30, 2010, $1.9million net of tax was recorded to accumulated other comprehensive loss on thecondensed consolidated balance sheet.

 

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

 

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

 

NOTE 15. Legal Matters

 

In the fourth quarter offiscal 2008, the United States Environmental Protection Agency (“EPA”) informedthe Company that it believed that the Company had violated the Clean Air Act byvirtue of the fact that certain of this merchandise did not conform to theircorresponding EPA Certificates of Conformity. During the third quarter offiscal 2009, the Company and the EPA reached a settlement in principle of thismatter requiring that the Company (i) pay a monetary penalty of $5.0million, (ii) take certain corrective action with respect to certaininventory that had been restricted from sale during the course of theinvestigation, (iii) implement a formal compliance program and(iv) participate in certain non-monetary emission offset activities. TheCompany had previously accrued an amount equal to the agreed upon civil penaltyand a $3.0 million contingency accrual with respect to the restrictedinventory. During fiscal 2009, the Company reversed $2.0 million of theinventory accrual as a portion of the subject inventory was released for sale.During the second quarter of fiscal 2010, the Company reversed the remaining$1.0 million of the inventory accrual as the Company reached an agreement withthe merchandise vendor to cover the entire cost of retrofitting a portion ofthe remaining subject merchandise and to accept the balance of the subjectinventory for return for full credit. During the second quarter of fiscal 2010,the formal settlement agreement between the Company and the EPA became effectiveand the Company paid the monetary penalty.

 

The Company is also party tovarious other actions and claims arising in the normal course of business. TheCompany believes that amounts accrued for awards or assessments in connectionwith all such matters are adequate and that the ultimate resolution of thesematters will not have a material adverse effect on the Company’s financialposition. However, there exists a reasonable possibility of loss in excess ofthe amounts accrued, the amount of which cannot currently be estimated. Whilethe Company does not believe that the amount of such excess loss could bematerial to the Company’s financial position, any such loss could have amaterial adverse effect on the Company’s results of operations in the period(s) duringwhich the underlying matters are resolved.

 

14

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Table of Contents

 

NOTE 16. Supplemental GuarantorInformation

 

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

 

The following condensedconsolidating information presents, in separate columns, the condensedconsolidating balance sheets as of October 30, 2010 and January 30,2010 and the related condensed consolidating statements of operations for thethirteen and thirty-nine weeks ended October 30, 2010 and October 31,2009 and condensed consolidating statements of cash flows for the thirty-nineweeks ended October 30, 2010 and October 31, 2009 for (i) theCompany (“Pep Boys”) on a parent only basis, with its investment insubsidiaries recorded under the equity method, (ii) the SubsidiaryGuarantors on a combined basis including the consolidation by PBY Corporationof its wholly owned subsidiary, The Pep Boys Manny Moe & Jack ofCalifornia, (iii) the subsidiary of the Company that does not guaranteethe Notes, and (iv) the Company on a consolidated basis.

 

CONDENSED CONSOLIDATING BALANCESHEET

(dollars in thousands)

(unaudited)

 
| **As of October 30, 2010**  | ** ** | **Pep Boys** | ** ** | **Subsidiary  Guarantors** | ** ** | **Subsidiary Non-  Guarantors** | ** ** | **Consolidation/  Elimination** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------|------------|-------------------|------------|----------------------------|------------|--------------------------------------|------------|---------------------------------|------------|------------------|------------|
| **ASSETS**                                      |       |              |       |                       |       |                                 |       |                            |       |             |       |
| Current assets:                                 |       |              |       |                       |       |                                 |       |                            |       |             |       |
| Cash and cash equivalents                       |       | $                 | 55,772     |                       | $          | 41,441                               |       | $                               | 10,040     |             | $          | — |   | $ | 107,253 |   |
| Accounts receivable, net                        |       | 9,288             |       | 11,181                     |       | —                               |       | —                          |       | 20,469           |       |
| Merchandise inventories                         |       | 195,180           |       | 373,412                    |       | —                               |       | —                          |       | 568,592          |       |
| Prepaid expenses                                |       | 6,078             |       | 7,621                      |       | 2,978                                |       | (30                             | )          | 16,647           |       |
| Other current assets                            |       | 974               |       | 2,662                      |       | 52,776                               |       | (8,062                          | )          | 48,350           |       |
| Assets held for disposal                        |       | 903               |       | 475                        |       | —                               |       | —                          |       | 1,378            |       |
| Total current assets                            |       | 268,195           |       | 436,792                    |       | 65,794                               |       | (8,092                          | )          | 762,689          |       |
| Property and equipment—net                 |       | 232,033           |       | 447,825                    |       | 31,033                               |       | (19,058                         | )          | 691,833          |       |
| Investment in subsidiaries                      |       | 1,806,873         |       | —                     |       | —                               |       | (1,806,873                      | )          | —           |       |
| Intercompany receivables                        |       | —            |       | 1,089,934                  |       | 62,075                               |       | (1,152,009                      | )          | —           |       |
| Deferred income taxes                           |       | 7,457             |       | 47,004                     |       | —                               |       | —                          |       | 54,461           |       |
| Other long-term assets                          |       | 20,785            |       | 1,232                      |       | —                               |       | —                          |       | 22,017           |       |
| Total assets                                    |       | $                 | 2,335,343  |                       | $          | 2,022,787                            |       | $                               | 158,902    |             | $          | (2,986,032 | ) | $ | 1,531,000 |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**  |       |              |       |                       |       |                                 |       |                            |       |             |       |
| Current liabilities:                            |       |              |       |                       |       |                                 |       |                            |       |             |       |
| Accounts payable                                |       | $                 | 207,838    |                       | $          | —                               |       | $                               | —     |             | $          | — |   | $ | 207,838 |   |
| Trade payable program liability                 |       | 57,017            |       | —                     |       | —                               |       | —                          |       | 57,017           |       |
| Accrued expenses                                |       | 30,485            |       | 64,559                     |       | 131,910                              |       | (2,692                          | )          | 224,262          |       |
| Deferred income taxes                           |       | 10,423            |       | 32,438                     |       | —                               |       | (5,400                          | )          | 37,461           |       |
| Current maturities of long-term debt            |       | 1,079             |       | —                     |       | —                               |       | —                          |       | 1,079            |       |
| Total current liabilities                       |       | 306,842           |       | 96,997                     |       | 131,910                              |       | (8,092                          | )          | 527,657          |       |
| Long-term debt less current maturities          |       | 305,392           |       | —                     |       | —                               |       | —                          |       | 305,392          |       |
| Other long-term liabilities                     |       | 35,728            |       | 37,399                     |       | —                               |       | —                          |       | 73,127           |       |
| Deferred gain from asset sales                  |       | 66,574            |       | 108,510                    |       | —                               |       | (19,058                         | )          | 156,026          |       |
| Intercompany liabilities                        |       | 1,152,009         |       | —                     |       | —                               |       | (1,152,009                      | )          | —           |       |
| Total stockholders’ equity                 |       | 468,798           |       | 1,779,881                  |       | 26,992                               |       | (1,806,873                      | )          | 468,798          |       |
| Total liabilities and stockholders’ equity |       | $                 | 2,335,343  |                       | $          | 2,022,787                            |       | $                               | 158,902    |             | $          | (2,986,032 | ) | $ | 1,531,000 |   |

 

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

 

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CONDENSEDCONSOLIDATING STATEMENT OF OPERATIONS

(dollarsin thousands)

(unaudited)

 
| ** **                                                         | ** ** | ** **        | ** ** | **Subsidiary** | ** ** | **Subsidiary Non-** | ** ** | **Consolidation /** | ** ** | ** **       | ** ** |
|--------------------------------------------------------------------|------------|-------------------|------------|----------------|------------|--------------------------|------------|--------------------------|------------|------------------|------------|
| **Thirteen Weeks Ended October 30, 2010** | ** ** | **Pep Boys** | ** ** | **Guarantors** | ** ** | **Guarantors**           | ** ** | **Elimination**          | ** ** | **Consolidated** | ** ** |
|                                                               |       |              |       |           |       |                     |       |                     |       |             |       |
| Merchandise sales                                                  |       | $                 | 135,716    |           | $          | 262,652                  |       | $                        | —     |             | $          | — |   | $ | 398,368 |   |
| Service revenue                                                    |       | 35,246            |       | 62,750         |       | —                   |       | —                   |       | 97,996           |       |
| Other revenue                                                      |       | —            |       | —         |       | 5,736                    |       | (5,736                   | )          | —           |       |
| Total revenues                                                     |       | 170,962           |       | 325,402        |       | 5,736                    |       | (5,736                   | )          | 496,364          |       |
| Costs of merchandise sales                                         |       | 96,266            |       | 183,831        |       | —                   |       | (407                     | )          | 279,690          |       |
| Costs of service revenue                                           |       | 31,960            |       | 58,896         |       | —                   |       | (38                      | )          | 90,818           |       |
| Costs of other revenue                                             |       | —            |       | —         |       | 5,067                    |       | (5,067                   | )          | —           |       |
| Total costs of revenues                                            |       | 128,226           |       | 242,727        |       | 5,067                    |       | (5,512                   | )          | 370,508          |       |
| Gross profit from merchandise sales                                |       | 39,450            |       | 78,821         |       | —                   |       | 407                      |       | 118,678          |       |
| Gross profit from service revenue                                  |       | 3,286             |       | 3,854          |       | —                   |       | 38                       |       | 7,178            |       |
| Gross profit from other revenue                                    |       | —            |       | —         |       | 669                      |       | (669                     | )          | —           |       |
| Total gross profit                                                 |       | 42,736            |       | 82,675         |       | 669                      |       | (224                     | )          | 125,856          |       |
| Selling, general and administrative expenses                       |       | 37,672            |       | 73,920         |       | 88                       |       | (840                     | )          | 110,840          |       |
| Net gain from dispositions of assets                               |       | (105              | )          | 214            |       | —                   |       | —                   |       | 109              |       |
| Operating profit                                                   |       | 4,959             |       | 8,969          |       | 581                      |       | 616                      |       | 15,125           |       |
| Non-operating (expense) income                                     |       | (4,120            | )          | 21,206         |       | 617                      |       | (17,053                  | )          | 650              |       |
| Interest expense (income)                                          |       | 16,824            |       | 6,759          |       | (516                     | )          | (16,437                  | )          | 6,630            |       |
| (Loss) earnings from continuing operations before  income taxes    |       | (15,985           | )          | 23,416         |       | 1,714                    |       | —                   |       | 9,145            |       |
| Income tax (benefit) expense                                       |       | (6,173            | )          | 8,979          |       | 665                      |       | —                   |       | 3,471            |       |
| Equity in earnings of subsidiaries                                 |       | 15,517            |       | —         |       | —                   |       | (15,517                  | )          | —           |       |
| Net earnings from continuing operations                            |       | 5,705             |       | 14,437         |       | 1,049                    |       | (15,517                  | )          | 5,674            |       |
| Discontinued operations, net of tax                                |       | 13                |       | 31             |       | —                   |       | —                   |       | 44               |       |
| Net earnings                                                       |       | $                 | 5,718      |           | $          | 14,468                   |       | $                        | 1,049      |             | $          | (15,517 | ) | $ | 5,718 |   |

 
| ** **                                                         | ** ** | ** **        | ** ** | **Subsidiary** | ** ** | **Subsidiary Non-** | ** ** | **Consolidation /** | ** ** | ** **       | ** ** |
|--------------------------------------------------------------------|------------|-------------------|------------|----------------|------------|--------------------------|------------|---------------------|------------|------------------|------------|
| **Thirteen Weeks Ended October 31, 2009** | ** ** | **Pep Boys** | ** ** | **Guarantors** | ** ** | **Guarantors**           | ** ** | **Elimination**     | ** ** | **Consolidated** | ** ** |
|                                                               |       |              |       |           |       |                     |       |                |       |             |       |
| Merchandise Sales                                                  |       | $                 | 127,689    |           | $          | 251,171                  |       | $                   | —     |             | $          | — |   | $ | 378,860 |   |
| Service Revenue                                                    |       | 32,813            |       | 60,970         |       | —                   |       | —              |       | 93,783           |       |
| Other Revenue                                                      |       | —            |       | —         |       | 5,723                    |       | (5,723              | )          | —           |       |
| Total Revenues                                                     |       | 160,502           |       | 312,141        |       | 5,723                    |       | (5,723              | )          | 472,643          |       |
| Costs of Merchandise Sales                                         |       | 91,008            |       | 179,003        |       | —                   |       | (407                | )          | 269,604          |       |
| Costs of Service Revenue                                           |       | 28,607            |       | 56,201         |       | —                   |       | (38                 | )          | 84,770           |       |
| Costs of Other Revenue                                             |       | —            |       | —         |       | 4,270                    |       | (4,270              | )          | —           |       |
| Total Costs of Revenues                                            |       | 119,615           |       | 235,204        |       | 4,270                    |       | (4,715              | )          | 354,374          |       |
| Gross Profit from Merchandise Sales                                |       | 36,681            |       | 72,168         |       | —                   |       | 407                 |       | 109,256          |       |
| Gross Profit from Service Revenue                                  |       | 4,206             |       | 4,769          |       | —                   |       | 38                  |       | 9,013            |       |
| Gross Profit from Other Revenue                                    |       | —            |       | —         |       | 1,453                    |       | (1,453              | )          | —           |       |
| Total Gross Profit                                                 |       | 40,887            |       | 76,937         |       | 1,453                    |       | (1,008              | )          | 118,269          |       |
| Selling, General and Administrative Expenses                       |       | 39,249            |       | 71,841         |       | 79                       |       | (1,624              | )          | 109,545          |       |
| Net Gain from Dispositions of Assets                               |       | 877               |       | 455            |       | —                   |       | —              |       | 1,332            |       |
| Operating Profit                                                   |       | 2,515             |       | 5,551          |       | 1,374                    |       | 616                 |       | 10,056           |       |
| Non-Operating (Expense) Income                                     |       | (3,650            | )          | 21,650         |       | 616                      |       | (17,892             | )          | 724              |       |
| Interest Expense (Income)                                          |       | 17,280            |       | 7,440          |       | (522                     | )          | (17,276             | )          | 6,922            |       |
| (Loss) Earnings from Continuing Operations Before  Income Taxes    |       | (18,415           | )          | 19,761         |       | 2,512                    |       | —              |       | 3,858            |       |
| Income Tax (Benefit) Expense                                       |       | (6,760            | )          | 7,208          |       | 1,053                    |       | —              |       | 1,501            |       |
| Equity in Earnings of Subsidiaries                                 |       | 13,791            |       | —         |       | —                   |       | (13,791             | )          | —           |       |
| Net Earnings from Continuing Operations                            |       | 2,136             |       | 12,553         |       | 1,459                    |       | (13,791             | )          | 2,357            |       |
| Discontinued Operations, Net of Tax                                |       | (12               | )          | (221           | )          | —                   |       | —              |       | (233             | )          |
| Net Earnings                                                       |       | $                 | 2,124      |           | $          | 12,332                   |       | $                   | 1,459      |             | $          | (13,791 | ) | $ | 2,124 |   |

 

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| ** **                                                            | ** ** | ** **        | ** ** | **Subsidiary** | ** ** | **Subsidiary Non-** | ** ** | **Consolidation /** | ** ** | ** **       | ** ** |
|-----------------------------------------------------------------------|------------|-------------------|------------|----------------|------------|--------------------------|------------|--------------------------|------------|------------------|------------|
| **Thirty-nine Weeks Ended October 30, 2010** | ** ** | **Pep Boys** | ** ** | **Guarantors** | ** ** | **Guarantors**           | ** ** | **Elimination**          | ** ** | **Consolidated** | ** ** |
|                                                                  |       |              |       |           |       |                     |       |                     |       |             |       |
| Merchandise sales                                                     |       | $                 | 421,160    |           | $          | 792,576                  |       | $                        | —     |             | $          | — |   | $ | 1,213,736 |   |
| Service revenue                                                       |       | 107,616           |       | 189,900        |       | —                   |       | —                   |       | 297,516          |       |
| Other revenue                                                         |       | —            |       | —         |       | 17,208                   |       | (17,208                  | )          | —           |       |
| Total revenues                                                        |       | 528,776           |       | 982,476        |       | 17,208                   |       | (17,208                  | )          | 1,511,252        |       |
| Costs of merchandise sales                                            |       | 296,773           |       | 550,298        |       | —                   |       | (1,223                   | )          | 845,848          |       |
| Costs of service revenue                                              |       | 94,316            |       | 173,250        |       | —                   |       | (114                     | )          | 267,452          |       |
| Costs of other revenue                                                |       | —            |       | —         |       | 16,628                   |       | (16,628                  | )          | —           |       |
| Total costs of revenues                                               |       | 391,089           |       | 723,548        |       | 16,628                   |       | (17,965                  | )          | 1,113,300        |       |
| Gross profit from merchandise sales                                   |       | 124,387           |       | 242,278        |       | —                   |       | 1,223                    |       | 367,888          |       |
| Gross profit from service revenue                                     |       | 13,300            |       | 16,650         |       | —                   |       | 114                      |       | 30,064           |       |
| Gross profit from other revenue                                       |       | —            |       | —         |       | 580                      |       | (580                     | )          | —           |       |
| Total gross profit                                                    |       | 137,687           |       | 258,928        |       | 580                      |       | 757                      |       | 397,952          |       |
| Selling, general and administrative expenses                          |       | 118,983           |       | 217,431        |       | 258                      |       | (1,092                   | )          | 335,580          |       |
| Net gain from dispositions of assets                                  |       | 1,975             |       | 628            |       | —                   |       | —                   |       | 2,603            |       |
| Operating profit                                                      |       | 20,679            |       | 42,125         |       | 322                      |       | 1,849                    |       | 64,975           |       |
| Non-operating (expense) income                                        |       | (12,533           | )          | 61,727         |       | 1,850                    |       | (49,189                  | )          | 1,855            |       |
| Interest expense (income)                                             |       | 49,176            |       | 19,610         |       | (1,565                   | )          | (47,340                  | )          | 19,881           |       |
| (Loss) earnings from continuing operations before  income taxes       |       | (41,030           | )          | 84,242         |       | 3,737                    |       | —                   |       | 46,949           |       |
| Income tax (benefit) expense                                          |       | (16,029           | )          | 32,884         |       | 1,461                    |       | —                   |       | 18,316           |       |
| Equity in earnings of subsidiaries                                    |       | 53,295            |       | —         |       | —                   |       | (53,295                  | )          | —           |       |
| Net earnings from continuing operations                               |       | 28,294            |       | 51,358         |       | 2,276                    |       | (53,295                  | )          | 28,633           |       |
| Discontinued operations, net of tax                                   |       | (28               | )          | (339           | )          | —                   |       | —                   |       | (367             | )          |
| Net earnings                                                          |       | $                 | 28,266     |           | $          | 51,019                   |       | $                        | 2,276      |             | $          | (53,295 | ) | $ | 28,266 |   |

 
| ** **                                                            | ** ** | ** **        | ** ** | **Subsidiary** | ** ** | **Subsidiary Non-** | ** ** | **Consolidation /** | ** ** | ** **       | ** ** |
|-----------------------------------------------------------------------|------------|-------------------|------------|----------------|------------|--------------------------|------------|--------------------------|------------|------------------|------------|
| **Thirty-nine Weeks Ended October 31, 2009** | ** ** | **Pep Boys** | ** ** | **Guarantors** | ** ** | **Guarantors**           | ** ** | **Elimination**          | ** ** | **Consolidated** | ** ** |
| Merchandise Sales                                                     |       | $                 | 397,677    |           | $          | 771,431                  |       | $                        | —     |             | $          | — |   | $ | 1,169,108 |   |
| Service Revenue                                                       |       | 101,672           |       | 187,262        |       | —                   |       | —                   |       | 288,934          |       |
| Other Revenue                                                         |       | —            |       | —         |       | 17,168                   |       | (17,168                  | )          | —           |       |
| Total Revenues                                                        |       | 499,349           |       | 958,693        |       | 17,168                   |       | (17,168                  | )          | 1,458,042        |       |
| Costs of Merchandise Sales                                            |       | 282,482           |       | 545,170        |       | —                   |       | (1,223                   | )          | 826,429          |       |
| Costs of Service Revenue                                              |       | 86,371            |       | 169,296        |       | —                   |       | (114                     | )          | 255,553          |       |
| Costs of Other Revenue                                                |       | —            |       | —         |       | 16,412                   |       | (16,412                  | )          | —           |       |
| Total Costs of Revenues                                               |       | 368,853           |       | 714,466        |       | 16,412                   |       | (17,749                  | )          | 1,081,982        |       |
| Gross Profit from Merchandise Sales                                   |       | 115,195           |       | 226,261        |       | —                   |       | 1,223                    |       | 342,679          |       |
| Gross Profit from Service Revenue                                     |       | 15,301            |       | 17,966         |       | —                   |       | 114                      |       | 33,381           |       |
| Gross Profit from Other Revenue                                       |       | —            |       | —         |       | 756                      |       | (756                     | )          | —           |       |
| Total Gross Profit                                                    |       | 130,496           |       | 244,227        |       | 756                      |       | 581                      |       | 376,060          |       |
| Selling, General and Administrative Expenses                          |       | 116,471           |       | 211,643        |       | 234                      |       | (1,268                   | )          | 327,080          |       |
| Net Gain from Dispositions of Assets                                  |       | 891               |       | 428            |       | —                   |       | —                   |       | 1,319            |       |
| Operating Profit                                                      |       | 14,916            |       | 33,012         |       | 522                      |       | 1,849                    |       | 50,299           |       |
| Non-Operating (Expense) Income                                        |       | (11,700           | )          | 64,429         |       | 1,855                    |       | (52,918                  | )          | 1,666            |       |
| Interest Expense (Income)                                             |       | 45,680            |       | 22,278         |       | (1,565                   | )          | (51,069                  | )          | 15,324           |       |
| (Loss) Earnings from Continuing Operations Before  Income Taxes       |       | (42,464           | )          | 75,163         |       | 3,942                    |       | —                   |       | 36,641           |       |
| Income Tax (Benefit) Expense                                          |       | (17,865           | )          | 31,569         |       | 1,659                    |       | —                   |       | 15,363           |       |
| Equity in Earnings of Subsidiaries                                    |       | 45,372            |       | —         |       | —                   |       | (45,372                  | )          | —           |       |
| Net Earnings from Continuing Operations                               |       | 20,773            |       | 43,594         |       | 2,283                    |       | (45,372                  | )          | 21,278           |       |
| Discontinued Operations, Net of Tax                                   |       | (5                | )          | (505           | )          | —                   |       | —                   |       | (510             | )          |
| Net Earnings                                                          |       | $                 | 20,768     |           | $          | 43,089                   |       | $                        | 2,283      |             | $          | (45,372 | ) | $ | 20,768 |   |

 

18

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CONDENSEDCONSOLIDATING STATEMENT OF CASH FLOWS

(dollarsin thousands)

(unaudited)

 
| **Thirty-nine Weeks Ended October 30, 2010**                          | ** ** | **Pep Boys** | ** ** | **Subsidiary  Guarantors** | ** ** | **Subsidiary Non-  Guarantors** | ** ** | **Consolidation /  Elimination** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------------------------------------------|------------|-------------------|------------|----------------------------|------------|--------------------------------------|------------|---------------------------------------|------------|------------------|------------|
| **Cash flows from operating  activities:**                                                     |       |              |       |                       |       |                                 |       |                                  |       |             |       |
| Net earnings                                                                                   |       | $                 | 28,266     |                       | $          | 51,019                               |       | $                                     | 2,276      |             | $          | (53,295 | ) | $ | 28,266 |   |
| Adjustments to reconcile net earnings to net cash  (used in) provided by continuing operations |       | (24,436           | )          | 31,651                     |       | 476                                  |       | 51,447                                |       | 59,138           |       |
| Changes in operating assets and liabilities                                                    |       | 21,750            |       | (1,148                     | )          | (15,945                              | )          | —                                |       | 4,657            |       |
| Net cash provided by (used in) continuing  operations                                          |       | 25,580            |       | 81,522                     |       | (13,193                              | )          | (1,848                                | )          | 92,061           |       |
| Net cash used in discontinued operations                                                       |       | (30               | )          | (1,233                     | )          | —                               |       | —                                |       | (1,263           | )          |
| Net cash provided by (used in) operating  activities                                           |       | 25,550            |       | 80,289                     |       | (13,193                              | )          | (1,848                                | )          | 90,798           |       |
|                                                                                           |       |              |       |                       |       |                                 |       |                                  |       |             |       |
| Net cash used in continuing operations                                                         |       | (23,593           | )          | (17,814                    | )          | —                               |       | —                                |       | (41,407          | )          |
| Net cash provided by discontinued operations                                                   |       | —            |       | 569                        |       | —                               |       | —                                |       | 569              |       |
| Net cash used in investing activities                                                          |       | (23,593           | )          | (17,245                    | )          | —                               |       | —                                |       | (40,838          | )          |
|                                                                                           |       |              |       |                       |       |                                 |       |                                  |       |             |       |
| Net cash provided by (used in) financing  activities                                           |       | 27,971            |       | (31,882                    | )          | 20,030                               |       | 1,848                                 |       | 17,967           |       |
|                                                                                           |       |              |       |                       |       |                                 |       |                                  |       |             |       |
| Net increase in cash and cash equivalents                                                      |       | 29,928            |       | 31,162                     |       | 6,837                                |       | —                                |       | 67,927           |       |
| Cash and cash equivalents at beginning of period                                               |       | 25,844            |       | 10,279                     |       | 3,203                                |       | —                                |       | 39,326           |       |
| Cash and cash equivalents at end of period                                                     |       | $                 | 55,772     |                       | $          | 41,441                               |       | $                                     | 10,040     |             | $          | — |   | $ | 107,253 |   |

 
| **Thirty-Nine Weeks Ended October 31, 2009**                          | ** ** | **Pep Boys** | ** ** | **Subsidiary  Guarantors** | ** ** | **Subsidiary Non-  Guarantors** | ** ** | **Consolidation /  Elimination** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------------------------------------------|------------|-------------------|------------|----------------------------|------------|--------------------------------------|------------|---------------------------------------|------------|------------------|------------|
| **Cash Flows from Operating  Activities:**                                                     |       |              |       |                       |       |                                 |       |                                  |       |             |       |
| Net Earnings                                                                                   |       | $                 | 20,768     |                       | $          | 43,089                               |       | $                                     | 2,283      |             | $          | (45,372 | ) | $ | 20,768 |   |
| Adjustments to Reconcile Net Earnings to Net Cash  Provided by (Used in) Continuing Operations |       | (30,554           | )          | 35,260                     |       | 1,360                                |       | 43,523                                |       | 49,589           |       |
| Changes in operating assets and liabilities                                                    |       | 29,151            |       | (1,436                     | )          | (15,517                              | )          | —                                |       | 12,198           |       |
| Net cash provided by (used in) continuing  operations                                          |       | 19,365            |       | 76,913                     |       | (11,874                              | )          | (1,849                                | )          | 82,555           |       |
| Net cash used in discontinued operations                                                       |       | (5                | )          | (589                       | )          | —                               |       | —                                |       | (594             | )          |
| Net Cash Provided by (Used in) Operating  Activities                                           |       | 19,360            |       | 76,324                     |       | (11,874                              | )          | (1,849                                | )          | 81,961           |       |
|                                                                                           |       |              |       |                       |       |                                 |       |                                  |       |             |       |
| Net cash used in continuing operations                                                         |       | (11,144           | )          | (7,648                     | )          | —                               |       | —                                |       | (18,792          | )          |
| Net cash provided by discontinued operations                                                   |       | —            |       | 1,762                      |       | —                               |       | —                                |       | 1,762            |       |
| Net Cash Used in Investing Activities                                                          |       | (11,144           | )          | (5,886                     | )          | —                               |       | —                                |       | (17,030          | )          |
|                                                                                           |       |              |       |                       |       |                                 |       |                                  |       |             |       |
| Net Cash Provided by (Used In) Financing  Activities                                           |       | 5,066             |       | (68,097                    | )          | 15,762                               |       | 1,849                                 |       | (45,420          | )          |
|                                                                                           |       |              |       |                       |       |                                 |       |                                  |       |             |       |
| Net Increase in Cash and Cash Equivalents                                                      |       | 13,282            |       | 2,341                      |       | 3,888                                |       | —                                |       | 19,511           |       |
| Cash and Cash Equivalents at Beginning of Period                                               |       | 12,753            |       | 6,393                      |       | 2,186                                |       | —                                |       | 21,332           |       |
| Cash and Cash Equivalents at End of Period                                                     |       | $                 | 26,035     |                       | $          | 8,734                                |       | $                                     | 6,074      |             | $          | — |   | $ | 40,843 |   |

 

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Item 2. Management’s Discussion andAnalysis of Financial Condition and Results of Operations

 

OVERVIEW

 

The following discussion andanalysis explains the results of operations for the third fiscal quarter andthe first nine months of 2010 and 2009 and significant developments affectingour financial condition for the first nine months of 2010. This discussion andanalysis should be read in conjunction with the condensed consolidated interimfinancial statements and the notes to such condensed consolidated financialstatements included elsewhere in this Quarterly Report on Form 10-Q, andthe consolidated financial statements and the notes to such financialstatements included in Item 8, “Financial Statements and Supplementary Data” ofour Annual Report on Form 10-K for the fiscal year ended January 30,2010.

 

Introduction

 

The Pep Boys-Manny, Moe &Jack is the only national chain offering automotive service, tires, parts andaccessories. This positioning allows us to streamline the distribution channeland pass the savings on to our customers facilitating our vision of being theautomotive solutions provider of choice for the value oriented customer. Themajority of our stores are in a Supercenter format, which serves both “do-it-for-me”(“DIFM”, which includes service labor, installed merchandise and tires) and “do-it-yourself”(“DIY” or retail) customers with the highest quality service offerings andmerchandise. Most of our Supercenters also have a commercial sales program thatprovides delivery of tires, parts and other products to automotive repair shopsand dealers. In 2009, as part of our long-term strategy to lead with automotiveservice, we began complementing our existing Supercenter store base withService & Tire Centers. These Service & Tire Centers aredesigned to capture market share and leverage our existing Supercenter andsupport infrastructure. We opened 24 Service & Tire Centers in fiscal2009 and year-to-date in fiscal 2010 we have opened an additional 11 locations.We also opened four new Supercenters including two smaller prototypes (14,000sq. feet) in fiscal 2010. We are targeting a total of 35 new locations infiscal 2010 and 55 in fiscal 2011. As of October 30, 2010, we operated 557Supercenters and 36 Service & Tire Centers, as well as nine legacy PepBoys Express (retail only) stores throughout 35 states and Puerto Rico.

 

EXECUTIVE SUMMARY

 

Net earnings for the third quarterof 2010 were $5.7 million, a $3.6 million improvement over the $2.1 millionreported for the third quarter of 2009. The increase in profitability was theresult of increased sales across all lines of business and improved total grossprofit margins, partially offset by a minimal increase in selling, general andadministrative expenses.

 

Our diluted earnings per share forthe third quarter and first nine months of 2010 were $0.11 and $0.53,respectively, an improvement of $0.07 and $0.13 over the $0.04 and $0.40recorded for the corresponding periods of 2009.

 

Total revenue increased for thethird quarter and first nine months of 2010 by 5.0% and 3.6%, respectively, ascompared to the same periods of the prior year. For the third quarter of 2010,comparable store sales (sales generated by locations in operation during thesame period) increased by 3.5% compared to an increase of 1.6% for the prioryear quarter. This increase in comparable store sales included a 3.9% increasein comparable store merchandise sales and a 1.9% increase in comparable storeservice revenue. For the first nine months of 2010, our comparable store salesincreased by 2.2% compared to a decrease of 0.4% for the prior year period.This increase in comparable store sales included a 2.7% increase in comparablestore merchandise sales and a 0.4% increase in comparable store servicerevenue.

 

Various economic factors affectboth our consumers and our industry. Sales of non-discretionary productcategories are primarily impacted by miles driven, which have returned topre-recession low single-digit growth rates from February 2010 through September 2010(latest publicly available information), in part due to lower gasoline prices.Given the uncertainty of gasoline prices, we cannot predict whether gasolineprices will increase or decrease in the future, nor can we predict how anyfuture changes in gasoline prices will impact miles driven in future periods.In addition, we believe that continued high unemployment, the recent recessionand the credit crisis have also benefited our non-discretionary productcategories as customers have focused on maintaining their existing vehiclesrather than purchasing new vehicles. However, these same trends have negativelyimpacted sales in our discretionary product categories like accessories andcomplementary merchandise, although the rate of decline has moderatedsignificantly since the beginning of fiscal 2010 and were flat in the currentyear third quarter as compared to the corresponding period of the prior year.

 

We continue to focus on refiningand expanding our parts assortment to improve our in-stock position, improvingexecution and the customer experience, utilizing television and radioadvertising to communicate our value offerings and growing our rewards programto build customer loyalty and drive repeat business. We believe these effortsare responsible for increased customer traffic in our stores in all lines ofbusiness for the third quarter and first nine months of 2010.

 

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RESULTS OF OPERATIONS

 

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

 

***Analysis of Statement ofOperations***

 

Thirteen weeks ended October 30,2010 vs. Thirteen weeks ended October 31, 2009

 

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

 
| ** **                                               | ** ** | **Percentage of Total Revenues**    | ** ** | **Percentage Change**                         | ** ** |
|----------------------------------------------------------|------------|----------------------------------------------------|------------|----------------------------------------------------|------------|
| **Thirteen weeks ended**                       | ** ** | **October 30, 2010  (Fiscal 2010)** | ** ** | **October 31, 2009  (Fiscal 2009)** | ** ** | **Favorable  (Unfavorable)** | ** ** |
|                                                     |       |                                               |       |                                               |       |   |   |
| Merchandise sales                                        |       | 80.3                                               | %          | 80.2                                               | %          | 5.1 | % |
| Service revenue (1)                                      |       | 19.7                                               |       | 19.8                                               |       | 4.5 |   |
| Total revenues                                           |       | 100.0                                              |       | 100.0                                              |       | 5.0 |   |
| Costs of merchandise sales (2)                           |       | 70.2                                               | (3)        | 71.2                                               | (3)        | (3.7 | ) |
| Costs of service revenue (2)                             |       | 92.7                                               | (3)        | 90.4                                               | (3)        | (7.1 | ) |
| Total costs of revenues                                  |       | 74.6                                               |       | 75.0                                               |       | (4.6 | ) |
| Gross profit from merchandise sales                      |       | 29.8                                               | (3)        | 28.8                                               | (3)        | 8.6 |   |
| Gross profit from service revenue                        |       | 7.3                                                | (3)        | 9.6                                                | (3)        | (20.4 | ) |
| Total gross profit                                       |       | 25.4                                               |       | 25.0                                               |       | 6.4 |   |
| Selling, general and administrative expenses             |       | 22.3                                               |       | 23.2                                               |       | (1.2 | ) |
| Net gain (loss) from dispositions of assets              |       | —                                             |       | 0.3                                                |       | (91.8 | ) |
| Operating profit                                         |       | 3.0                                                |       | 2.1                                                |       | 50.4 |   |
| Non-operating income                                     |       | 0.1                                                |       | 0.2                                                |       | (10.2 | ) |
| Interest expense                                         |       | 1.3                                                |       | 1.5                                                |       | 4.2 |   |
| Earnings from continuing operations before income  taxes |       | 1.8                                                |       | 0.8                                                |       | 137.0 |   |
| Income tax expense                                       |       | 38.0                                               | (4)        | 38.9                                               | (4)        | (131.2 | ) |
| Earnings from continuing operations                      |       | 1.1                                                |       | 0.5                                                |       | 140.7 |   |
| Discontinued operations, net of tax                      |       | —                                             |       | —                                             |       | 118.9 |   |
| Net Earnings                                             |       | 1.2                                                |       | 0.4                                                |       | 169.2 |   |

 

----

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

 

Total revenue and comparable storesales for the third quarter of 2010 increased 5.0% and 3.5%, respectively, ascompared to the third quarter of 2009. Total revenue for the third quarter of2010 increased by $23.7 million to $496.4 million from $472.6 million in thethird quarter of 2009. The 3.5% increase in comparable store sales consisted ofincreases of 3.9% in comparable store merchandise sales and 1.9% in comparablestore service revenue. While our total revenue figures were favorably impactedby the opening of new stores, a new store is not added to our comparable storesales until it reaches its 13th month of operation.Non-comparable stores contributed an additional $7.2 million of total revenuein the third quarter of 2010 as compared to the third quarter of 2009. Totalcomparable store sales increased due to growth in customer counts in all threelines of business combined with an increase in the average transaction amountper customer.

 

Total merchandise sales increased5.1%, or $19.5 million, to $398.4 million in the third quarter of fiscal 2010,compared to $378.9 million during the prior year quarter. Comparable storemerchandise sales increased 3.9%, or $14.7 million, as compared to the prior

 

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year quarter, driven primarily by ahigher average transaction amount per customer combined with an increase incomparable store customer count. The balance of the increase in merchandisesales was due to the contribution from our new stores. Total service revenueincreased 4.5% to $98.0 million in the third quarter of 2010 from the $93.8million recorded in the prior year quarter. Comparable store service revenueincreased 1.9% due to higher customer counts partially offset by a decrease inaverage transaction amount per customer. The remaining increase in servicerevenue was due to the contribution from our new stores which accounted for anadditional $2.4 million of service revenue.

 

In the third quarter of 2010,comparable store customer counts increased versus the third quarter of 2009 dueto our traffic-driving promotional events and rewards program, and customerreceptiveness to our improved in-stock position and better store execution. Wealso experienced a 5.0% increase in comparable store sales of our coreautomotive parts categories which make up approximately 81% of our merchandisesales. Sales of our discretionary product categories were relatively flat ascompared to the prior year quarter. We believe that utilizing innovativemarketing programs to communicate our value-priced, differentiated merchandiseassortment will continue to drive increased customer counts and that ourcontinued focus on delivering a better customer experience than our competitorswill convert those increased customer counts into sales improvementsconsistently over all lines of business.

 

Gross profit from merchandise salesincreased by $9.4 million, or 8.6%, to $118.7 million for the third quarter of2010 from $109.3 million in the third quarter of 2009. Gross profit margin frommerchandise sales increased to 29.8% for the third quarter of 2010 from 28.8%for the third quarter of 2009. Gross profit from merchandise sales for the thirdquarter of 2009 included an asset impairment charge of $2.4 million, offset bythe reversal of inventory related accruals of $1.0 million and a gain from aninsurance settlement of $0.6 million. Excluding these adjustments, gross profitmargin from merchandise sales increased to 29.8% from 29.1% in the prior yearquarter. The increase in gross profit margins was primarily due to increasedmerchandise sales which resulted in higher absorption of occupancy costs suchas rent and utilities, improved inventory shrinkage, and lower defectiveproduct expense, slightly offset by higher in-bound freight costs.

 

Gross profit from service revenuedecreased by $1.8 million, or 20.4%, to $7.2 million in the third quarter of2010 from $9.0 million recorded in the third quarter of 2009. Gross profitmargin from service revenue decreased to 7.3% for the third quarter of 2010from 9.6% for the prior year quarter. Gross profit from service revenue for thethird quarter of 2009 included an asset impairment charge of $0.7 million.Excluding this adjustment, gross profit margin from service revenue decreasedto 7.3% for the third quarter of 2010 from 10.3% in the prior year quarter. The decrease in gross profit wasdue to higher payroll and related expenses, including health insurance costs,state payroll taxes and workers compensation claims, which increased by 131basis points as compared to the prior year quarter. In addition, there was anunfavorable impact on gross profit from service revenue due to our new Service &Tire Centers, which are in their ramp up stage for sales while incurring thefull amount of fixed expenses, including payroll and occupancy costs (includessuch items as rent, utilities and building maintenance). Our new Service &Tire Centers negatively impacted gross margins by 149 basis points in the thirdquarter of 2010  as compared to prioryear third quarter.

 

Selling, general and administrativeexpenses as a percentage of total revenues decreased to 22.3% for the thirdquarter of 2010 from 23.2% for the third quarter of 2009. Selling, general andadministrative expenses increased $1.3 million, or 1.2%, to $110.8 million inthe third quarter of 2010 from $109.5 million in the prior year quarter. Thereduction as a percentage of sales reflects improved leverage of selling,general and administrative expenses achieved through increased sales in thethird quarter of 2010.

 

Net gains from the disposition ofassets declined by $1.2 million to $0.1 million in the third quarter of 2010from $1.3 million in the prior year quarter. The third quarter of 2009 includedgains of $1.3 million from the sale and leaseback of three stores.

 

Interest expense declined by $0.3million to $6.6 million in the third quarter of 2010 compared to $6.9 millionin the third quarter of 2009.

 

Our income tax expense for thethird quarter of 2010 was $3.5 million, or an effective rate of 38.0%, ascompared to an expense of $1.5 million, or an effective rate of 38.9%, for thethird quarter of 2009. The annual rate depends on a number of factors,including the jurisdiction in which operating profit is earned and the timingand nature of discrete items.

 

As a result of the foregoing, wereported net earnings of $5.7 million in the third quarter of 2010 as comparedto net earnings of $2.1 million in the prior year period. Our basic and dilutedearnings per share were $0.11 for the third quarter of 2010, as compared to$0.04 for the prior year quarter.

 

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Thirty-nine weeks ended October 30,2010 vs. Thirty-nine weeks ended October 31, 2009

 

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

 
| ** **                                               | ** ** | **Percentage of Total Revenues**    | ** ** | **Percentage Change**                         | ** ** |
|----------------------------------------------------------|------------|----------------------------------------------------|------------|----------------------------------------------------|------------|
| **Thirty-nine weeks ended**                    | ** ** | **October 30, 2010  (Fiscal 2010)** | ** ** | **October 31, 2009  (Fiscal 2009)** | ** ** | **Favorable  (Unfavorable)** | ** ** |
|                                                     |       |                                               |       |                                               |       |   |   |
| Merchandise sales                                        |       | 80.3                                               | %          | 80.2                                               | %          | 3.8 | % |
| Service revenue (1)                                      |       | 19.7                                               |       | 19.8                                               |       | 3.0 |   |
| Total revenues                                           |       | 100.0                                              |       | 100.0                                              |       | 3.6 |   |
| Costs of merchandise sales (2)                           |       | 69.7                                               | (3)        | 70.7                                               | (3)        | (2.3 | ) |
| Costs of service revenue (2)                             |       | 89.9                                               | (3)        | 88.4                                               | (3)        | (4.7 | ) |
| Total costs of revenues                                  |       | 73.7                                               |       | 74.2                                               |       | (2.9 | ) |
| Gross profit from merchandise sales                      |       | 30.3                                               | (3)        | 29.3                                               | (3)        | 7.4 |   |
| Gross profit from service revenue                        |       | 10.1                                               | (3)        | 11.6                                               | (3)        | (9.9 | ) |
| Total gross profit                                       |       | 26.3                                               |       | 25.8                                               |       | 5.8 |   |
| Selling, general and administrative expenses             |       | 22.2                                               |       | 22.4                                               |       | (2.6 | ) |
| Net gain (loss) from dispositions of assets              |       | 0.2                                                |       | 0.1                                                |       | 97.3 |   |
| Operating profit                                         |       | 4.3                                                |       | 3.4                                                |       | 29.2 |   |
| Non-operating income                                     |       | 0.1                                                |       | 0.1                                                |       | 11.3 |   |
| Interest expense                                         |       | 1.3                                                |       | 1.1                                                |       | (29.7 | ) |
| Earnings from continuing operations before income  taxes |       | 3.1                                                |       | 2.5                                                |       | 28.1 |   |
| Income tax expense                                       |       | 39.0                                               | (4)        | 41.9                                               | (4)        | (19.2 | ) |
| Earnings from continuing operations                      |       | 1.9                                                |       | 1.5                                                |       | 34.6 |   |
| Discontinued operations, net of tax                      |       | —                                             |       | —                                             |       | 28.0 |   |
| Net Earnings                                             |       | 1.9                                                |       | 1.4                                                |       | 36.1 |   |

 

----

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

 

Total revenue and comparable storesales for the first nine months of 2010 increased 3.6% and 2.2%, respectively,as compared to the first nine months of 2009. The 2.2% increase in comparablestore sales consisted of increases of 2.7% in comparable store merchandisesales and 0.4% in comparable store service revenue. While our total revenuefigures were favorably impacted by the opening of new stores, a new store isnot added to our comparable store sales until it reaches its 13th month of operation.Non-comparable stores contributed an additional $21.0 million of total revenuein the first nine months of 2010 as compared to the prior year period. Totalcomparable store sales increased due to growth in customer counts in all threelines of business combined with an increase in the average transaction amount.

 

Gross profit from merchandise salesincreased by $25.2 million, or 7.4%, to $367.9 million for the first ninemonths of 2010 from $342.7 million in the first nine months of 2009. Grossprofit margin from merchandise sales increased to 30.3% from 29.3% in the prioryear period. The increase in gross profit margin was primarily due to lowerinventory shrinkage and lower defective product expenses.

 

Gross profit from service revenuedecreased by $3.3 million, or 9.9%, to $30.1 million in the first nine months of2010 from $33.4 million in the first nine months of 2009. Gross profit marginfrom service revenue decreased to 10.1% for the first nine months of 2010 from11.6% for the prior year period. The decrease in gross profit was primarily dueto higher payroll and related expenses and occupancy costs (rent, utilities andbuilding maintenance), which increased by 140 basis points combined as comparedto the prior

 

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year period, incurred at our newService & Tire Centers. Excluding the impact of the new Service &Tire Centers, which are in their ramp up stage for sales while incurring thefull amount of fixed expenses, margins remained relatively flat period overperiod.

 

Selling, general and administrativeexpenses as a percentage of total revenues decreased to 22.2% for the firstnine months of 2010 from 22.4% for the first nine months of 2009. Selling,general and administrative expenses increased $8.5 million, or 2.6%, over theamount recorded in the first nine months of 2009. The increase was primarilydue to higher payroll and related benefits expense of $6.8 million andincreased media expense of $1.5 million.

 

Net gains from the disposition ofassets increased by $1.3 million to $2.6 million in the first nine months of2010 from $1.3 million in the first nine months of 2009. The current yearincludes $2.1 million in net settlement proceeds from the disposition of a previouslyclosed property, while the prior year period reflects gains of $1.3 millionfrom the sale and leaseback of three stores.

 

Interest expense for the first ninemonths of 2010 was $19.9 million, an increase of $4.6 million compared to thefirst nine months of 2009. The prior year included a $6.2 million gainresulting from the retirement of debt. Excluding this gain, interest expensedeclined period over period, by $1.7 million due to reduced debt levels.

 

Our income tax expense for thefirst nine months of 2010 was $18.3 million, or an effective rate of 39.0%, ascompared to an expense of $15.4 million, or an effective rate of 41.9%, for thefirst nine months of 2009. The change was primarily due to release of valuationreserves on certain unitary state net operating loss carryforwards as a resultof our improved profitability. The annual rate is dependent on a number offactors, including the jurisdiction in which operating profit is earned and thetiming and nature of discrete items.

 

As a result of the foregoing, wereported net earnings of $28.3 million in the first nine months of 2010 ascompared to net earnings of $20.8 million in the first nine months of 2009. Ourdiluted earnings per share was $0.53 for the first nine months of 2010 as comparedto $0.40 for the prior year period.

 

INDUSTRY COMPARISON

 

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

 

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

 
| ** **                                       | ** ** | **Thirteen Weeks Ended** | ** ** | **Thirty-nine Weeks Ended** | ** ** |
|--------------------------------------------------|------------|------------------------------------|------------|---------------------------------------|------------|
| ** **                                       | ** ** | **October 30,**               | ** ** | **October 31,**                  | ** ** | **October 30,** | ** ** | **October 31,** | ** ** |
| **(Dollar amounts in thousands)** | ** ** | **2010**                           | ** ** | **2009**                              | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                             |       |                               |       |                                  |       |   |   |   |   |
| Retail Sales (1)                                 |       | $                                  | 256,862    |                                  | $          | 246,275 |   | $ | 795,373 |   | $ | 770,121 |   |
| Service Center Revenue (2)                       |       | 239,502                            |       | 226,368                               |       | 715,879 |   | 687,921 |   |
| Total revenues                                   |       | $                                  | 496,364    |                                  | $          | 472,643 |   | $ | 1,511,252 |   | $ | 1,458,042 |   |
|                                             |       |                               |       |                                  |       |   |   |   |   |
| Gross profit from Retail Sales (3)               |       | $                                  | 73,954     |                                  | $          | 65,846 |   | $ | 232,538 |   | $ | 210,147 |   |
| Gross profit from Service Center Revenue (3)     |       | 51,902                             |       | 52,423                                |       | 165,414 |   | 165,913 |   |
| Total gross profit                               |       | $                                  | 125,856    |                                  | $          | 118,269 |   | $ | 397,952 |   | $ | 376,060 |   |

 

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(1)   Excludesrevenues from installed products.

(2)   Includesrevenues from installed products.

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

 

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CAPITAL AND LIQUIDITY

 

Our cash requirements ariseprincipally from (1) the purchase of inventory and capital expendituresrelated to existing and new stores, offices and distribution centers, (2) debtservice and (3) contractual obligations. Cash flows realized through thesales of automotive services, tires, parts and accessories are our primarysource of liquidity. Net cash provided by operating activities was $90.8million in the first nine months of 2010, as compared to $82.0 million in theprior year period. The $8.8 million improvement from the prior year period wasdue to increased net earnings (net of non-cash adjustments) of $17.0 million,partially offset by an unfavorable change in operating assets and liabilitiesof $7.5 million and an increase in cash used in discontinued operations of $0.7million. The change in operating assets and liabilities was primarily due tounfavorable changes in inventory net of accounts payable of $5.3 million and inother long term liabilities of $4.4 million. However, after taking intoconsideration changes in our trade payable program liability (shown as cashflows from financing activities on the condensed consolidated statements ofcash flows), inventory net of accounts payable improved by $23.1 millionprimarily due to increased inventory purchases and an improvement in our vendortrade payable terms. The ratio of accounts payable, including our trade payableprogram, to inventory was 46.6% at October 30, 2010, and 43.0% at October 31,2009. The change in other long-term liabilities was due to a discretionarycontribution to our defined benefit pension plan of $5.0 million (see Note 12to the condensed consolidated financial statements).

 

Cash used in investing activitieswas $40.8 million in the first nine months of 2010 as compared to $17.0 millionin the prior year period. During the first nine months of 2010, we sold fiveproperties classified as held for disposal for net proceeds of $3.5 million, ofwhich $0.6 million is included in discontinued operations, completed one saleleaseback transaction for net proceeds of $1.6 million and received $2.1 millionin net settlement proceeds from the disposition of a previously closedproperty. During the first nine months of 2009, we sold three propertiesclassified as held for disposal for net proceeds of $2.8 million, of which $1.8million is reported in discontinued operations, and completed three saleleaseback transactions for net proceeds of $11.0 million. Capital expendituresin the first nine months of 2010 increased by $15.2 million, to $43.0 million,from $27.8 million in the prior year period. Capital expenditures for thecurrent year were for improvements of our existing stores, offices,distribution centers and for the opening of the new facilities. During thethird quarter of 2010, we invested $5.0 million in a restricted account ascollateral for retained liabilities included within existing insurance programsin lieu of previously outstanding letters of credit.

 

Our targeted capital expendituresfor fiscal 2010 are $80.0 million. Our fiscal year 2010 capital expendituresinclude the addition of approximately 35 new locations and requiredexpenditures for our existing stores, offices and distribution centers. Theseexpenditures are expected to be funded by cash on hand and net cash generatedfrom operating activities. Additional capacity, if needed, exists under ourexisting line of credit.

 

In the first nine months of 2010,cash provided by financing activities was $18.0 million, as compared to cashused in financing of $45.4 million in the prior year period. The $63.4 millionimprovement was primarily due to increased net borrowings under our tradepayable program of $28.4 million. This program is funded by various bankparticipants who have the ability, but not the obligation, to purchase,directly from our vendors, account receivables owed by Pep Boys. In the currentyear, we increased the availability under this financing program to $80.0million from $50.0 million and as of October 30, 2010, January 30,2010 and October 31, 2009, we had an outstanding balance of $57.0 million,$34.1 million and $26.5 million, respectively, (classified as trade payableprogram liability on the condensed consolidated balance sheet). Additionally,in the first nine months of 2009, we repurchased $17.0 million of ouroutstanding 7.5% Senior Subordinated Notes for $10.7 million and repaid $23.9million of borrowings under our revolving credit agreement.

 

We anticipate that cash on hand andcash generated by operating activities will exceed our expected cashrequirements in fiscal year 2010. In addition, we expect to have excessavailability under our existing revolving credit agreement during the entiretyof fiscal year 2010. As of October 30, 2010, we had zero drawn on ourrevolving credit facility and maintained undrawn availability of $139.5million.

 

Our working capital was $235.0million and $205.5 million at October 30, 2010 and January 30, 2010,respectively. Our long-term debt, as a percentage of our total capitalization,was 39.4% and 40.9% at October 30, 2010 and January 30, 2010,respectively.

 

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NEW ACCOUNTING STANDARDS

 

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

 

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

 

CRITICAL ACCOUNTING POLICIES ANDESTIMATES

 

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

 

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

 

FORWARD-LOOKING STATEMENTS

 

Certain statements contained hereinconstitute “forward-looking statements” within the meaning of The PrivateSecurities Litigation Reform Act of 1995. The words “guidance,” “expect,” “anticipate,”“estimates,” “forecasts” and similar expressions are intended to identify suchforward-looking statements. Forward-looking statements include management’sexpectations regarding implementation of its long-term strategic plan, futurefinancial performance, automotive aftermarket trends, levels of competition,business development activities, future capital expenditures, financing sourcesand availability and the effects of regulation and litigation. Although webelieve that the expectations reflected in such forward-looking statements arebased on reasonable assumptions, we can give no assurance that our expectationswill be achieved. Our actual results may differ materially from the resultsdiscussed in the forward-looking statements due to factors beyond our control,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 andQualitative Disclosures About Market Risk

 

Our primary market risk exposurewith regard to financial instruments is due to changes in interest rates.Pursuant to the terms of our Revolving Credit Agreement, changes in LIBOR orthe Prime Rate could affect the rates at which we could borrow fundsthereunder. At October 30, 2010 we had no borrowings under this facility.Additionally, we have a $148.9 million Senior Secured Term Loan that bearsinterest at three month LIBOR plus 2.0%.

 

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

 

The fair value of the derivativeswas $19.4 million and $16.4 million payable at October 30, 2010 andJanuary 30, 2010, respectively. Of the $3.0 million increase in theliabilities during the thirty-nine weeks ended October 30, 2010, $1.9million net of tax was recorded to accumulated other comprehensive loss on thecondensed consolidated balance sheet.

 

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Item 4.  Controls and Procedures

 

EVALUATION OF DISCLOSURE CONTROLSAND PROCEDURES

 

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

 

CHANGES IN INTERNAL CONTROL OVER FINANCIALREPORTING

 

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

 

Item 5.  Other Information

 

None.

 

PART II - OTHER INFORMATION

 

Item 1.  Legal Proceedings

 

In the fourth quarter offiscal 2008, the United States Environmental Protection Agency (“EPA”) informedthe Company that it believed that the Company had violated the Clean Air Act byvirtue of the fact that certain of this merchandise did not conform to theircorresponding EPA Certificates of Conformity. During the third quarter offiscal 2009, the Company and the EPA reached a settlement in principle of thismatter requiring that the Company (i) pay a monetary penalty of $5.0million, (ii) take certain corrective action with respect to certaininventory that had been restricted from sale during the course of the investigation,(iii) implement a formal compliance program and (iv) participate incertain non-monetary emission offset activities. The Company had previouslyaccrued an amount equal to the agreed upon civil penalty and a$3.0 million contingency accrual with respect to the restricted inventory.During fiscal 2009, the Company reversed $2.0 million of the inventoryaccrual as a portion of the subject inventory was released for sale. During thesecond quarter of fiscal 2010, the Company reversed the remaining $1.0 millionof the inventory accrual as the Company reached an agreement with themerchandise vendor to cover the entire cost of retrofitting a portion of theremaining subject merchandise and to accept the balance of the subjectinventory for return for full credit. During the second quarter of fiscal 2010,the formal settlement agreement between the Company and the EPA becameeffective and the Company paid the monetary penalty.

 

The Company is also party tovarious other actions and claims arising in the normal course of business. TheCompany believes that amounts accrued for awards or assessments in connectionwith all such matters are adequate and that the ultimate resolution of thesematters will not have a material adverse effect on the Company’s financialposition. However, there exists a reasonable possibility of

 

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loss in excess of theamounts accrued, the amount of which cannot currently be estimated. While theCompany does not believe that the amount of such excess loss could be materialto the Company’s financial position, any such loss could have a materialadverse effect on the Company’s results of operations in the period(s) duringwhich the underlying matters are resolved.

 

Item 1A.  Risk Factors

 

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

 

Item 2.  Unregistered Sales ofEquity Securities and Use of Proceeds

 

None.

 

Item 3.  Defaults Upon SeniorSecurities

 

None.

 

Item 4.  (Removed andReserved)

 

Item 5.  Other Information

 

None.

 

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Item 6.  Exhibits

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

 

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SIGNATURES

 

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

 

 
|                                          | THE  PEP BOYS - MANNY, MOE & JACK                                           |
|-----------------------------------------------|--------------------------------------------------------------------------------------|
|                                          | (Registrant)                                                                         |
|                                          |                                                                                 |   |
| Date:   December 7,  2010 | by:                                                                                  | /s/  Raymond L. Arthur |
|                                          |                                                                                 |
|                                          | Raymond  L. Arthur                                                                   |
|                                          | Executive  Vice President and Chief Financial Officer  (Principal 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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