v2.3.0.11
CONSOLIDATED BALANCE SHEETS (USD $)
In Thousands
Jul. 30, 2011
Jan. 29, 2011
Current assets:    
Cash and cash equivalents $ 61,977 $ 90,240
Accounts receivable, less allowance for uncollectible accounts of $1,191 and $1,551 21,731 19,540
Merchandise inventories 584,297 564,402
Prepaid expenses 19,694 28,542
Other current assets 50,891 60,812
Total current assets 738,590 763,536
Property and equipment - net 693,742 700,981
Goodwill 48,584 2,549
Deferred income taxes 67,988 66,019
Other long-term assets 31,700 23,587
Total assets 1,580,604 1,556,672
Current liabilities:    
Accounts payable 230,884 210,440
Trade payable program liability 61,440 56,287
Accrued expenses 206,627 236,028
Deferred income taxes 58,825 56,335
Current maturities of long-term debt 1,079 1,079
Total current liabilities 558,855 560,169
Long-term debt less current maturities 294,583 295,122
Other long-term liabilities 75,688 70,046
Deferred gain from asset sales 146,573 152,875
Commitments and contingencies    
Stockholders' equity:    
Common stock, par value $1 per share: authorized 500,000,000 shares; issued 68,557,041 shares 68,557 68,557
Additional paid-in capital 295,934 295,361
Retained earnings 424,923 402,600
Accumulated other comprehensive loss (15,870) (17,028)
Treasury stock, at cost - 15,883,352 shares and 15,971,910 shares (268,639) (271,030)
Total stockholders' equity 504,905 478,460
Total liabilities and stockholders' equity $ 1,580,604 $ 1,556,672
v2.3.0.11
CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)
In Thousands, except Share data
Jul. 30, 2011
Jan. 29, 2011
CONSOLIDATED BALANCE SHEETS    
Accounts receivable, allowance for uncollectible accounts (in dollars) $ 1,191 $ 1,551
Common stock, par value (in dollars per share) $ 1 $ 1
Common stock, authorized shares 500,000,000 500,000,000
Common stock, issued shares 68,557,041 68,557,041
Treasury stock, shares 15,883,352 15,971,910
v2.3.0.11
CONSOLIDATED STATEMENTS OF OPERATIONS AND CHANGES IN RETAINED EARNINGS (USD $)
In Thousands, except Per Share data
3 Months Ended 6 Months Ended
Jul. 30, 2011
Jul. 31, 2010
Jul. 30, 2011
Jul. 31, 2010
Merchandise sales $ 415,267 $ 406,179 $ 823,894 $ 815,368
Service revenue 107,327 98,676 212,240 199,520
Total revenues 522,594 504,855 1,036,134 1,014,888
Costs of merchandise sales 287,721 282,362 573,050 566,158
Costs of service revenue 99,663 87,992 192,752 176,634
Total costs of revenues 387,384 370,354 765,802 742,792
Gross profit from merchandise sales 127,546 123,817 250,844 249,210
Gross profit from service revenue 7,664 10,684 19,488 22,886
Total gross profit 135,210 134,501 270,332 272,096
Selling, general and administrative expenses 113,268 113,108 222,168 224,740
Net (loss) gain from dispositions of assets (3) 2,449 86 2,494
Operating profit 21,939 23,842 48,250 49,850
Non-operating income 569 621 1,156 1,205
Interest expense 6,444 6,643 12,941 13,251
Earnings from continuing operations before income taxes and discontinued operations 16,064 17,820 36,465 37,804
Income tax expense 2,173 7,021 10,169 14,845
Earnings from continuing operations before discontinued operations 13,891 10,799 26,296 22,959
Income (loss) from discontinued operations, net of tax 52 (201) 15 (411)
Net earnings 13,943 10,598 26,311 22,548
Increase (Decrease) in Retained Earnings        
Retained earnings, beginning of period 412,716 384,451 402,600 374,836
Cash dividends (1,586) (1,581) (3,171) (3,160)
Shares issued and other (150) (223) (817) (979)
Retained earnings, end of period $ 424,923 $ 393,245 $ 424,923 $ 393,245
Basic earnings per share:        
Earnings from continuing operations (in dollars per share) $ 0.26 $ 0.21 $ 0.49 $ 0.44
Discontinued operations, net of tax (in dollars per share)   $ (0.01)   $ (0.01)
Basic earnings per share (in dollars per share) $ 0.26 $ 0.20 $ 0.49 $ 0.43
Diluted earnings per share:        
Earnings from continuing operations (in dollars per share) $ 0.26 $ 0.20 $ 0.49 $ 0.43
Discontinued operations, net of tax (in dollars per share) $ 0   $ 0  
Diluted earnings per share (in dollars per share) $ 0.26 $ 0.20 $ 0.49 $ 0.43
Cash dividends per share (in dollars per share) $ 0.03 $ 0.03 $ 0.06 $ 0.06
v2.3.0.11
CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)
In Thousands
6 Months Ended
Jul. 30, 2011
Jul. 31, 2010
Cash flows from operating activities:    
Net earnings $ 26,311 $ 22,548
Adjustments to reconcile net earnings to net cash provided by continuing operations:    
(Income) loss from discontinued operations, net of tax (15) 411
Depreciation and amortization 39,654 36,656
Amortization of deferred gain from asset sales (6,302) (6,299)
Stock compensation expense 1,908 1,998
Deferred income taxes 4,238 5,600
Net gain from disposition of assets (86) (2,494)
Loss from asset impairment 389 970
Other 272 179
Changes in assets and liabilities, net of the effects of acquisitions:    
Decrease in accounts receivable, prepaid expenses and other 21,816 19,673
(Increase) decrease in merchandise inventories (12,917) 186
Increase (decrease) in accounts payable 12,043 (6,298)
Decrease in accrued expenses (33,202) (14,917)
(Decrease) increase in other long-term liabilities (2,831) 911
Net cash provided by continuing operations 51,278 59,124
Net cash used in discontinued operations (44) (1,249)
Net cash provided by operating activities 51,234 57,875
Cash flows from investing activities:    
Capital expenditures (30,636) (27,284)
Proceeds from dispositions of assets 89 4,077
Premiums paid on life insurance policies (795) (500)
Collateral investment (4,763) 500
Acquisitions, net of cash acquired (42,757) (144)
Net cash used in continuing operations (78,862) (23,351)
Net cash provided by discontinued operations   569
Net cash used in investing activities (78,862) (22,782)
Cash flows from financing activities:    
Borrowings under line of credit agreements 5,045 16,290
Payments under line of credit agreements (5,045) (16,290)
Borrowings on trade payable program liability 59,097 63,808
Payments on trade payable program liability (53,944) (42,627)
Payment for finance issuance cost (2,441)  
Debt payments (539) (540)
Dividends paid (3,171) (3,160)
Other 363 463
Net cash (used in) provided by financing activities (635) 17,944
Net (decrease) increase in cash and cash equivalents (28,263) 53,037
Cash and cash equivalents at beginning of period 90,240 39,326
Cash and cash equivalents at end of period 61,977 92,363
Supplemental disclosure of cash flow information:    
Cash paid for income taxes 629 810
Cash paid for interest 11,523 11,452
Non-cash investing activities:    
Accrued purchases of property and equipment $ 1,416 $ 662
v2.3.0.11
BASIS OF PRESENTATION
6 Months Ended
Jul. 30, 2011
BASIS OF PRESENTATION  
BASIS OF PRESENTATION

NOTE 1BASIS OF PRESENTATION

 

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

 

Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been omitted, as permitted by Rule 10-01 of the Securities and Exchange Commission’s Regulation S-X, “Interim Financial Statements.” It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 29, 2011. The results of operations for the twenty-six weeks ended July 30, 2011 are not necessarily indicative of the operating results for the full fiscal year.

 

The consolidated financial statements presented herein are unaudited. In the opinion of management, all adjustments necessary to present fairly the financial position, results of operations and cash flows as of July 30, 2011 and for all periods presented have been made.

 

The Company’s fiscal year ends on the Saturday nearest January 31. Accordingly, references to fiscal years 2011 and 2010 refer to the fiscal year ending January 28, 2012 and the fiscal year ended January 29, 2011, respectively.

 

The Company maintains a trade payable program that is funded by various bank participants who have the ability, but not the obligation, to purchase account receivables owed by the Company from its vendors. The Company, in turn, makes the regularly scheduled full vendor payments to the bank participants. In the first quarter of fiscal 2011 as a result of the Company’s review, the Company determined that the gross amount of borrowings and payments on the trade payable program shown on the statement of cash flows under “Cash flows from financing activities” included certain vendors that had not participated in the trade payable program. As such, the Company made an equal and offsetting adjustment to reduce the trade payables borrowings and payments line items within financing activities by $106.1 million for the twenty-six weeks ended July 31, 2010. The full year impact of this adjustment is to reduce the line items $225.2 million and $90.3 million for the years ended January 29, 2011 and January 30, 2010, respectively.  These adjustments have no net impact on net cash used in financing activities or on any other cash flow line items.

v2.3.0.11
NEW ACCOUNTING STANDARDS
6 Months Ended
Jul. 30, 2011
NEW ACCOUNTING STANDARDS  
NEW ACCOUNTING STANDARDS

NOTE 2NEW ACCOUNTING STANDARDS

 

In December 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2010-29 “Business Combinations (Topic 805) — Disclosure of Supplementary Pro Forma Information for Business Combinations” (“ASU 2010-29”). This accounting standard update clarifies that SEC registrants presenting comparative financial statements should disclose in their pro forma information revenue and earnings of the combined entity as though the current period business combinations had occurred as of the beginning of the comparable prior annual reporting period only. The update also expands the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. ASU 2010-29 is effective prospectively for material business combinations entered into in fiscal years beginning on or after December 15, 2010 with early adoption permitted. The Company adopted ASU 2010-29 during the first quarter of the current fiscal year.

 

In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Topic 820) — Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (“ASU 2011-04”), which is effective for annual reporting periods beginning after December 15, 2011. This guidance amends certain accounting and disclosure requirements related to fair value measurements. The Company is currently evaluating ASU 2011-04 and has not yet determined the impact the adoption will have on the consolidated financial statements.

 

In June of 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income” (“ASU 2011-05”). ASU 2011-05 was issued to improve the comparability of financial reporting between U.S. GAAP and IFRS, and eliminates previous U.S. GAAP guidance that allowed an entity to present components of other comprehensive income (“OCI”) as part of its statement of changes in shareholders’ equity. With the issuance of ASU 2011-05, companies are now required to report all components of OCI either in a single continuous statement of total comprehensive income, which includes components of both OCI and net income, or in a separate statement appearing consecutively with the statement of income. ASU 2011-05 does not affect current guidance for the accounting of the components of OCI, or which items are included within total comprehensive income, and is effective for periods beginning after December 15, 2011, with early adoption permitted. The application of this guidance affects presentation only and therefore is not expected to have an impact on the Company’s consolidated financial condition, results of operations or cash flows.

v2.3.0.11
ACQUISITIONS
6 Months Ended
Jul. 30, 2011
ACQUISITIONS  
ACQUISITIONS

NOTE 3ACQUISITIONS

 

During the current fiscal year, the Company acquired the assets related to seven service and tire centers located in the Seattle-Tacoma area, the assets related to seven service and tire centers located in the Houston, Texas area and all outstanding shares of capital stock of Tire Stores Group Holding Corporation which operated an 85-store chain in Florida, Georgia and Alabama under the name Big 10. Collectively, the acquired stores produced approximately $94.7 million in sales annually based on audited and unaudited pre-acquisition historical information. The total purchase price of these stores was approximately $42.6 million in cash and the assumption of certain liabilities. The acquisitions were financed through cash flows provided by operations. The results of operations of these acquired stores are included in the Company’s results from their respective acquisition dates.

 

The Company has recorded its initial accounting for these acquisitions in accordance with accounting guidance on business combinations. The acquisitions resulted in goodwill related to, among other things, growth opportunities and assembled workforces. A portion of the goodwill is expected to be deductible for tax purposes. The Company has recorded finite-lived intangible assets at their estimated fair value related to trade name, favorable and unfavorable leases.

 

The Company expensed all costs related to these acquisitions during fiscal 2011. The total costs related to these acquisitions were $1.3 million and are included in the consolidated statement of operations within selling, general and administrative expenses.

 

The purchase price of the acquisitions have been preliminarily allocated to the net tangible and intangible assets acquired, with the remainder recorded as goodwill on the basis of estimated fair values, as follows:

 

 

 

As of

 

 

 

Acquisition

 

(dollar amounts in thousands)

 

Dates

 

Current assets

 

$

11,498

 

Intangible assets

 

830

 

Other non-current assets

 

7,177

 

Current liabilities

 

(13,468

)

Long-term liabilities

 

(9,458

)

Total net identifiable assets acquired

 

$

(3,421

)

 

 

 

 

Total consideration transferred, net of cash acquired

 

$

42,614

 

Less: total net identifiable assets acquired

 

(3,421

)

Goodwill

 

$

46,035

 

 

Intangible assets consist of trade names ($0.6 million) and favorable leases ($0.2 million). Long-term liabilities includes unfavorable leases ($9.1 million). The trade names are being amortized over their estimated useful life of 3 years. The favorable and unfavorable lease intangible assets and liabilities are being amortized to rent expense over their respective lease terms, ranging from 2 to 16 years.

 

Sales and net earnings for the fiscal 2011 acquired stores totaled $21.9 million and $0.7 million, respectively for the period from acquisition date through July 30, 2011.

 

The purchase price allocation remains preliminary for some of the acquired stores due to the finalization of certain valuation adjustments. The Company believes that this will be finalized by the fourth quarter of fiscal 2011 and that any adjustments to the purchase price allocation will not be material.

 

As our acquisitions (including Big 10) were immaterial to our operating results both individually and in aggregate for the thirteen and twenty six week periods ended July 30, 2011 and July 31, 2010, pro forma results of operations are not disclosed.

v2.3.0.11
MERCHANDISE INVENTORIES
6 Months Ended
Jul. 30, 2011
MERCHANDISE INVENTORIES  
MERCHANDISE INVENTORIES

NOTE 4MERCHANDISE INVENTORIES

 

Merchandise inventories are valued at the lower of cost or market. Cost is determined by using the last-in, first-out (“LIFO”) method. An actual valuation of inventory under the LIFO method can be made only at the end of each fiscal year based on inventory and costs at that time. Accordingly, interim LIFO calculations must be based on management’s estimates of expected fiscal year-end inventory levels and costs. If the first-in, first-out (“FIFO”) method of costing inventory had been used by the Company, inventory would have been $518.6 million and $486.0 million as of July 30, 2011 and January 29, 2011, respectively.

 

The Company’s inventory, consisting primarily of auto parts and accessories, is used on vehicles typically having long lives. Because of this, and combined with the Company’s historical experience of returning excess inventory to the Company’s vendors for full credit, the risk of obsolescence is minimal. The Company establishes a reserve for excess inventory for instances where less than full credit will be received for such returns or where the Company anticipates items will be sold at retail prices that are less than recorded costs. The reserve is based on management’s judgment, including estimates and assumptions regarding marketability of products, the market value of inventory to be sold in future periods and on historical experiences where the Company received less than full credit from vendors for product returns. The Company also provides for estimated inventory shrinkage based upon historical levels and the results of its cycle counting program. The Company’s inventory adjustments for these matters were approximately $5.5 million at July 30, 2011 and $6.0 million at January 29, 2011.

v2.3.0.11
PROPERTY AND EQUIPMENT
6 Months Ended
Jul. 30, 2011
PROPERTY AND EQUIPMENT  
PROPERTY AND EQUIPMENT

NOTE 5PROPERTY AND EQUIPMENT

 

The Company’s property and equipment as of July 30, 2011 and January 29, 2011 was as follows:

 

(dollar amounts in thousands)

 

July 30, 2011

 

January 29, 2011

 

 

 

 

 

 

 

Property and equipment

 

 

 

 

 

Land

 

$

204,023

 

$

204,023

 

Buildings and improvements

 

857,687

 

848,268

 

Furniture, fixtures and equipment

 

707,709

 

685,481

 

Construction in progress

 

4,020

 

8,781

 

Accumulated depreciation and amortization

 

(1,079,697

)

(1,045,572

)

Property and equipment — net

 

$

693,742

 

$

700,981

 

v2.3.0.11
WARRANTY RESERVE
6 Months Ended
Jul. 30, 2011
WARRANTY RESERVE  
WARRANTY RESERVE

NOTE 6WARRANTY RESERVE

 

The Company provides warranties for both its merchandise sales and service labor. Warranties for merchandise are generally covered by the respective vendors, with the Company covering any costs above the vendor’s stipulated allowance. Service labor is warranted in full by the Company for a limited specific time period. The Company establishes its warranty reserves based on historical experiences. These costs are included in either costs of merchandise sales or costs of service revenues in the consolidated statements of operations.

 

The reserve for warranty cost activity for the twenty-six weeks ended July 30, 2011 and the fifty-two weeks ended January 29, 2011 is as follows:

 

(dollar amounts in thousands)

 

July 30, 2011

 

January 29, 2011

 

Beginning balance

 

$

673

 

$

694

 

 

 

 

 

 

 

Additions related to current period sales

 

6,346

 

12,261

 

 

 

 

 

 

 

Warranty costs incurred in current period

 

(6,346

)

(12,282

)

 

 

 

 

 

 

Ending balance

 

$

673

 

$

673

 

v2.3.0.11
DEBT AND FINANCING ARRANGEMENTS
6 Months Ended
Jul. 30, 2011
DEBT AND FINANCING ARRANGEMENTS  
DEBT AND FINANCING ARRANGEMENTS

NOTE 7DEBT AND FINANCING ARRANGEMENTS

 

The following are the components of debt and financing arrangements:

 

(dollar amounts in thousands)

 

July 30, 2011

 

January 29, 2011

 

7.50% Senior Subordinated Notes, due December 2014

 

$

147,565

 

$

147,565

 

Senior Secured Term Loan, due October 2013

 

148,097

 

148,636

 

Revolving Credit Agreement, expiring July 2016

 

 

 

Long-term debt

 

295,662

 

296,201

 

Current maturities

 

(1,079

)

(1,079

)

Long-term debt less current maturities

 

$

294,583

 

$

295,122

 

 

As of July 30, 2011, 126 stores collateralized the Senior Secured Term Loan.

 

On July 26, 2011, the Company amended and restated its Revolving Credit Agreement. The Company’s ability to borrow under the Revolving Credit Agreement is based on a specific borrowing base consisting of inventory and accounts receivable up to a maximum availability of $300.0 million. The amendment reduced the interest rate applicable to borrowings by 75 basis points to a rate between London Interbank Offered Rate (LIBOR) plus 2.00% to 2.50% and extended the maturity date of the Revolving Credit Agreement to July 26, 2016. The related refinancing fees of $2.4 million are being amortized over the new five year life. As of July 30, 2011, there were no outstanding borrowings under the Revolving Credit Agreement and $30.0 million of availability was utilized to support outstanding letters of credit. Taking this into account and the borrowing base requirements, as of July 30, 2011, there was $201.0 million of availability remaining.

 

Several of the Company’s debt agreements require compliance with covenants. The most restrictive of these covenants, an earnings before interest, taxes, depreciation and amortization (“EBITDA”) requirement, is triggered if the Company’s availability under its credit agreement drops below $50.0 million. As of July 30, 2011, the Company had an availability of $201.0 million and was in compliance with all covenants contained in its debt agreements.

 

Interest rates that are currently available to the Company for issuance of debt with similar terms and remaining maturities are used to estimate fair value for debt issues that are not quoted on an exchange. The estimated fair value of long-term debt including current maturities was $300.5 million and $298.3 million as of July 30, 2011 and January 29, 2011, respectively.

v2.3.0.11
SALE-LEASEBACK TRANSACTIONS
6 Months Ended
Jul. 30, 2011
SALE-LEASEBACK TRANSACTIONS  
SALE-LEASEBACK TRANSACTIONS

NOTE 8SALE-LEASEBACK TRANSACTIONS

 

The Company did not execute any sale-leaseback transactions during the twenty-six weeks ended July 30, 2011. During the twenty-six weeks ended July 31, 2010, the Company sold one property to an unrelated third party for net proceeds of $1.6 million. Concurrent with this sale, the Company entered into an agreement to lease the property back from the purchaser over a minimum lease term of 15 years. The Company classified this lease as an operating lease. The Company actively uses this property and considers the lease as a normal leaseback. The Company recorded a deferred gain of $0.4 million.

 

The Company operated 725 store locations at July 30, 2011, of which 232 were owned and 493 were leased.

v2.3.0.11
INCOME TAXES
6 Months Ended
Jul. 30, 2011
INCOME TAXES  
INCOME TAXES

NOTE 9INCOME TAXES

 

The Company recognizes taxes payable for the current year, as well as deferred tax assets and liabilities for the future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. The Company must assess the likelihood that any recorded deferred tax assets will be recovered against future taxable income. To the extent the Company believes it is more likely than not that the asset will not be recoverable, a valuation allowance must be established. All available evidence, both positive and negative, is considered to determine whether based on the weight of that evidence a valuation allowance is needed. To establish this positive evidence, the Company considers future projections of income and various tax planning strategies for generating income sufficient to utilize the deferred tax assets. Due to an organizational restructuring of its subsidiaries and the Company’s improved profitability and projected future income, the Company released $3.4 million (net of federal tax) of valuation allowance relating primarily to certain unitary state net operating loss carryforwards and credits during the thirteen weeks ended July 30, 2011.

 

For income tax benefits related to uncertain tax positions to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. During the thirteen and twenty-six weeks ended July 30, 2011, the Company did not have a material change to its uncertain tax position liabilities.

v2.3.0.11
ACCUMULATED OTHER COMPREHENSIVE LOSS
6 Months Ended
Jul. 30, 2011
ACCUMULATED OTHER COMPREHENSIVE LOSS.  
ACCUMULATED OTHER COMPREHENSIVE LOSS

NOTE 10ACCUMULATED OTHER COMPREHENSIVE LOSS

 

The following are the components of other comprehensive income:

 

 

 

Thirteen Weeks Ended

 

Twenty-six Weeks Ended

 

(dollar amounts in thousands)

 

July 30,
2011

 

July 31,
2010

 

July 30,
2011

 

July 31,
2010

 

Net earnings

 

$

13,943

 

$

10,598

 

$

26,311

 

$

22,548

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

Defined benefit plan adjustment

 

253

 

265

 

473

 

530

 

Derivative financial instrument adjustment

 

170

 

(1,800

)

685

 

(1,597

)

Comprehensive income

 

$

14,366

 

$

9,063

 

$

27,469

 

$

21,481

 

 

The components of accumulated other comprehensive loss are:

 

(dollar amounts in thousands)

 

July 30, 2011

 

January 29, 2011

 

 

 

 

 

 

 

Defined benefit plan adjustment, net of tax

 

$

(6,103

)

$

(6,576

)

Derivative financial instrument adjustment, net of tax

 

(9,767

)

(10,452

)

Accumulated other comprehensive loss

 

$

(15,870

)

$

(17,028

)

v2.3.0.11
IMPAIRMENTS AND ASSETS HELD FOR SALE
6 Months Ended
Jul. 30, 2011
IMPAIRMENTS AND ASSETS HELD FOR SALE  
IMPAIRMENTS AND ASSETS HELD FOR SALE

NOTE 11IMPAIRMENTS AND ASSETS HELD FOR SALE

 

During the second quarter of fiscal 2011 and 2010, the Company recorded a $0.4 million and a $0.8 million impairment charge, respectively, related to stores classified as held and used. The Company used a probability-weighted approach and estimates of expected future cash flows to determine the fair value of the stores. Discount and growth rate assumptions were derived from current economic conditions, management’s expectations and projected trends of current operating results. The fair market value estimate is classified as a Level 3 measure within the fair value hierarchy. Of the $0.4 million impairment charge in fiscal 2011, $0.1 million was charged to costs of merchandise sales, and $0.3 million was charged to costs of service revenues. Of the $0.8 million impairment charge in fiscal 2010, $0.6 million was charged to costs of merchandise sales, and $0.2 million was charged to costs of service revenue.

 

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

 

The Company did not sell any properties during the twenty-six week period ending July 30, 2011.

 

During the thirteen week period ended July 31, 2010, the Company sold one store classified as held for disposal for net proceeds of $0.8 million and recognized a net gain of $0.2 million. During the twenty-six week period ended July 31, 2010, the Company sold four stores classified as held for disposal for net proceeds of $2.9 million and recognized a net gain of $0.3 million.

 

Assets held for sale were $0.4 million as of July 30, 2011 and $0.5 million as of January 29, 2011 and are recorded within other current assets.

v2.3.0.11
EARNINGS PER SHARE
6 Months Ended
Jul. 30, 2011
EARNINGS PER SHARE  
EARNINGS PER SHARE

NOTE 12EARNINGS PER SHARE

 

The following table presents the calculation of basic and diluted earnings per share for earnings from continuing operations and net earnings:

 

 

 

Thirteen Weeks Ended

 

Twenty-six Weeks Ended

 

(in thousands, except per share amounts)

 

July 30,
2011

 

July 31,
2010

 

July 30,
2011

 

July 31,
2010

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)

 

Earnings from continuing operations

 

$

13,891

 

$

10,799

 

$

26,296

 

$

22,959

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from discontinued operations, net of tax

 

52

 

(201

)

15

 

(411

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

13,943

 

$

10,598

 

$

26,311

 

$

22,548

 

 

 

 

 

 

 

 

 

 

 

 

 

(b)

 

Basic average number of common shares outstanding during period

 

52,952

 

52,682

 

52,901

 

52,609

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common shares assumed issued upon exercise of dilutive stock options, net of assumed repurchase, at the average market price

 

697

 

447

 

691

 

426

 

 

 

 

 

 

 

 

 

 

 

 

 

(c)

 

Diluted average number of common shares assumed outstanding during period

 

53,649

 

53,129

 

53,592

 

53,035

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share:

 

 

 

 

 

 

 

 

 

 

 

Earnings from continuing operations (a/b)

 

$

0.26

 

$

0.21

 

$

0.49

 

$

0.44

 

 

 

Discontinued operations, net of tax

 

 

(0.01

)

 

(0.01

)

 

 

Basic earnings per share

 

$

0.26

 

$

0.20

 

$

0.49

 

$

0.43

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

 

 

 

 

 

 

Net earnings from continuing operations (a/c)

 

$

0.26

 

$

0.20

 

$

0.49

 

$

0.43

 

 

 

Discontinued operations, net of tax

 

 

 

 

 

 

 

Diluted earnings per share

 

$

0.26

 

$

0.20

 

$

0.49

 

$

0.43

 

 

At July 30, 2011 and July 31, 2010, respectively, there were 2,682,000 and 2,402,000 outstanding options and restricted stock units. Certain stock options were excluded from the calculation of diluted earnings per share because their exercise prices were greater than the average market price of the common shares for the periods then ended and therefore would be anti-dilutive. The total numbers of such shares excluded from the diluted earnings per share calculation are 830,000 and 1,088,000 for the twenty-six weeks ended July 30, 2011 and July 31, 2010, respectively. The total numbers of such shares excluded from the diluted earnings per share calculation are 888,000 and 1,071,000 for the thirteen weeks ended July 30, 2011 and July 31, 2010, respectively.

v2.3.0.11
BENEFIT PLANS
6 Months Ended
Jul. 30, 2011
BENEFIT PLANS  
BENEFIT PLANS

NOTE 13BENEFIT PLANS

 

The Company has a qualified 401(k) savings plan and a separate plan for employees residing in Puerto Rico, which cover all full-time employees who are at least 21 years of age with one or more years of service. The Company also maintains a non-qualified defined contribution Supplemental Executive Retirement Plan (the “Account Plan”) for key employees designated by the Board of Directors. The Company’s contribution to these plans for fiscal 2011 is contingent upon meeting certain performance metrics. The Company has not recorded any contribution expense for these plans in the first half of 2011. The Company’s expense related to the savings plans and the Account Plan for the thirteen weeks ended July 31, 2010 was approximately $0.7 million and $0.3 million, respectively, and for the twenty six-weeks ended July 31, 2010, approximately $1.6 million and $0.7 million, respectively.

 

The Company also has a frozen defined benefit pension plan covering the Company’s full-time employees hired on or before February 1, 1992. The Company’s expense for its pension plan follows:

 

 

 

Thirteen Weeks Ended

 

Twenty-six Weeks Ended

 

(dollar amounts in thousands)

 

July 30, 2011

 

July 31, 2010

 

July 30, 2011

 

July 31, 2010

 

 

 

 

 

 

 

 

 

 

 

Interest cost

 

627

 

640

 

1,278

 

1,280

 

Expected return on plan assets

 

(721

)

(537

)

(1,372

)

(1,075

)

Amortization of net loss

 

405

 

422

 

756

 

843

 

Net periodic benefit cost

 

$

311

 

$

525

 

$

662

 

$

1,048

 

 

The defined benefit pension plan is subject to minimum funding requirements of the Employee Retirement Income Security Act of 1974 as amended. While the Company has no minimum funding requirement during fiscal 2011, it made a $3.0 million discretionary contribution to the defined benefit pension plan on April 28, 2011.

v2.3.0.11
EQUITY COMPENSATION PLANS
6 Months Ended
Jul. 30, 2011
EQUITY COMPENSATION PLANS  
EQUITY COMPENSATION PLANS

NOTE 14EQUITY COMPENSATION PLANS

 

The Company has stock-based compensation plans, under which it grants stock options and restricted stock units to key employees and members of its Board of Directors. The Company generally recognizes compensation expense on a straight-line basis over the vesting period.

 

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

 

 

 

Number of Shares

 

Outstanding — January 29, 2011

 

1,831,802

 

Granted

 

265,139

 

Exercised

 

(28,226

)

Forfeited

 

(2,483

)

Expired

 

(30,683

)

Outstanding — July 30, 2011

 

2,035,549

 

 

In the first half of fiscal year 2011, the Company granted approximately 265,000 stock options with a weighted average grant date fair value of $5.38. These options have a seven year term and vest over a three year period with a third vesting on each of the three grant date anniversaries. The compensation expense recorded during the thirteen weeks and twenty-six weeks ended July 30, 2011, for the options granted was minimal.

 

In the first half of fiscal year 2010, the Company granted approximately 303,000 stock options with a weighted average grant date fair value of $4.26. These options have a seven year term and vest over a three year period with a third vesting on each of the three grant date anniversaries. The compensation expense recorded during the thirteen and twenty-six weeks ended July 31, 2010, for the options granted was minimal.

 

The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model. Expected volatility is based on historical volatilities for a time period similar to that of the expected term blended with market based implied volatility at the time of the grant. The risk-free rate is based on the U.S. treasury yield curve for issues with a remaining term equal to the expected term.

 

The following are the weighted-average assumptions:

 

 

 

July 30, 2011

 

July 31, 2010

 

Dividend yield

 

1.04

%

1.35

%

Expected volatility

 

58.17

%

55.71

%

Risk-free interest rate range:

 

 

 

 

 

High

 

1.90

%

2.01

%

Low

 

1.60

%

1.71

%

Ranges of expected lives in years

 

4 - 5

 

4 - 5

 

 

RESTRICTED STOCK UNITS

 

Performance Based Awards

 

In the first quarter of fiscal 2011, the Company granted approximately 95,000 restricted stock units that will vest if the employees remain continuously employed through the third anniversary date of the grant and the Company achieves a return on invested capital target for fiscal year 2013. The number of underlying shares that may be issued upon vesting will range from 0% to 150%, depending upon the Company achieving the financial targets in fiscal year 2013. The fair value for these awards was $12.48 at the date of the grant. The compensation expense recorded for these restricted stock units was minimal during the thirteen weeks and twenty-six weeks ended July 30, 2011.

 

In the first quarter of fiscal 2010, the Company granted approximately 105,000 restricted stock units that will vest if the employees remain continuously employed through the third anniversary date of the grant and the Company achieves a return on invested capital target for fiscal year 2012. The number of underlying shares that may be issued upon vesting will range from 0% to 150%, depending upon the Company achieving the financial targets in fiscal year 2012. The fair value for these awards was $10.34 at the date of the grant. The compensation expense recorded for these restricted stock units during the thirteen weeks and twenty-six weeks ended July 30, 2011 and July 31, 2010, was minimal.

 

Market Based Awards

 

In the first quarter of fiscal 2011, the Company granted approximately 48,000 restricted stock units that will vest if the employees remain continuously employed through the third anniversary date of the grant and will become exercisable if the Company satisfies a total shareholder return target in fiscal 2013. The number of underlying shares that may become exercisable will range from 0% to 175% depending upon whether the market condition is achieved. The Company used a Monte Carlo simulation to estimate a $14.73 grant date fair value. The compensation expense recorded for these restricted stock units during the thirteen weeks and twenty-six weeks ended July 30, 2011, was minimal.

 

In the first quarter of fiscal 2010, the Company granted approximately 52,000 restricted stock units that will vest if the employees remain continuously employed through the third anniversary date of the grant and will become exercisable if the Company satisfies a total shareholder return target in fiscal 2012. The number of underlying shares that may become exercisable will range from 0% to 175% depending upon whether the market condition is achieved. The Company used a Monte Carlo simulation to estimate a $12.99 grant date fair value. The compensation expense recorded for these restricted stock units during the thirteen weeks and twenty-six weeks ended July 30, 2011 and July 31, 2010, was minimal.

 

Other Awards

 

In the first quarter of fiscal 2011 and 2010, the Company granted approximately 50,000 and 61,000 restricted stock units related to officers’ deferred bonus matches under the Company’s non-qualified deferred compensation plan, which vest over a three year period.

 

In the second quarter of fiscal 2011, the Company granted approximately 42,000 restricted stock units to its non-employee directors of the board that vested immediately. The fair value was $10.67 per unit and the Company recognized compensation expense of approximately $0.4 million for these restricted stock units.

 

In the second quarter of fiscal 2010, the Company granted approximately 52,000 restricted stock units to its non-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.

 

The following table summarizes the units under the Company’s plan, assuming maximum vesting of underlying shares for the performance and market based awards described above:

 

 

 

Number of RSUs

 

Nonvested — January 29, 2011

 

432,331

 

Granted

 

321,314

 

Forfeited

 

(3,051

)

Vested

 

(99,911

)

Nonvested — July 30, 2011

 

650,683

 

v2.3.0.11
FAIR VALUE MEASUREMENTS AND DERIVATIVES
6 Months Ended
Jul. 30, 2011
FAIR VALUE MEASUREMENTS AND DERIVATIVES  
FAIR VALUE MEASUREMENTS AND DERIVATIVES

NOTE 15FAIR VALUE MEASUREMENTS AND DERIVATIVES

 

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

 

Fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. There is a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors market participants would use in valuing the asset or liability developed based upon the best information available in the circumstances. The hierarchy is broken down into three levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs include quoted prices for similar assets or liabilities in active markets. Level 3 inputs are unobservable inputs for the asset or liability. Categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

 

The following table provides information by level for assets and liabilities that are measured at fair value, on a recurring basis:

 

(dollar amounts in thousands)

 

Fair Value
at

 

Fair Value Measurements
Using Inputs Considered as

 

Description

 

July 30, 2011

 

Level 1

 

Level 2

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

61,977

 

$

61,977

 

$

 

$

 

Collateral investments (1)

 

14,400

 

14,400

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

Contingent consideration (2)

 

288

 

 

 

288

 

Other liabilities

 

 

 

 

 

 

 

 

 

Derivative liability (3)

 

15,387

 

 

15,387

 

 

Contingent consideration (3)

 

1,136

 

 

 

1,136

 

 

(dollar amounts in thousands)

 

Fair Value
at

 

Fair Value Measurements
Using Inputs Considered as

 

Description

 

January 29, 2011

 

Level 1

 

Level 2

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

90,240

 

$

90,240

 

$

 

$

 

Collateral investments (1)

 

9,638

 

9,638

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

Contingent consideration (2)

 

288

 

 

 

288

 

Other liabilities

 

 

 

 

 

 

 

 

 

Derivative liability (3)

 

16,424

 

 

16,424

 

 

Contingent consideration (3)

 

1,224

 

 

 

1,224

 

 

(1) included in other long-term assets

(2) included in accrued liabilities

(3) included in other long-term liabilities

 

During fiscal 2010, the Company invested $9.6 million in restricted accounts as collateral for its retained liabilities included within existing insurance programs in lieu of previously outstanding letters of credit. During the twenty-six weeks of fiscal 2011, the company invested an additional $4.8 million. The collateral investment is included in other long-term assets on the consolidated balance sheet.

 

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

 

The table below shows the effect of the Company’s interest rate swap on the consolidated financial statements for the periods indicated:

 

(dollar amounts in thousands)

 

Amount of Gain in
Other Comprehensive
Income/ (Loss)
(Effective Portion)

 

Earnings Statement
Classification

 

Amount of Loss
Recognized in Earnings
(Effective Portion) (a)

 

Thirteen weeks ended July 30, 2011

 

$

150

 

Interest expense

 

$

(1,772

)

Thirteen weeks ended July 31, 2010

 

$

(1,801

)

Interest expense

 

$

(1,753

)

Twenty-six weeks ended July 30, 2011

 

$

648

 

Interest expense

 

$

(3,491

)

Twenty-six weeks ended July 31, 2010

 

$

(1,621

)

Interest expense

 

$

(3,448

)

 

 

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

 

The fair value of the derivative was $15.4 million and $16.4 million payable at July 30, 2011 and January 29, 2011, respectively. Of the $1.0 million decrease in the fair value during the twenty-six weeks ended July 30, 2011, $0.7 million net of tax was recorded to accumulated other comprehensive loss on the consolidated balance sheet.

 

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

 

Certain assets, such as goodwill and long-lived assets, are measured at fair value on a non-recurring basis, that is, the assets are subject to fair value adjustments in certain circumstances such as when there is evidence of impairment. These measures of fair value, and related inputs, are considered level 2 or level 3 measures under the fair value hierarchy.

v2.3.0.11
LEGAL MATTERS
6 Months Ended
Jul. 30, 2011
LEGAL MATTERS  
LEGAL MATTERS

NOTE 16LEGAL MATTERS

 

The Company is party to various actions and claims arising in the normal course of business. The Company believes that amounts accrued for awards or assessments in connection with all such matters are adequate and that the ultimate resolution of these matters will not have a material adverse effect on the Company’s financial position. However, there exists a reasonable possibility of loss in excess of the amounts accrued, the amount of which cannot currently be estimated. While the Company does not believe that the amount of such excess loss could be material to the Company’s financial position, any such loss could have a material adverse effect on the Company’s results of operations in the period(s) during which the underlying matters are resolved.

v2.3.0.11
SUPPLEMENTAL GUARANTOR INFORMATION
6 Months Ended
Jul. 30, 2011
SUPPLEMENTAL GUARANTOR INFORMATION  
SUPPLEMENTAL GUARANTOR INFORMATION

NOTE 17SUPPLEMENTAL GUARANTOR INFORMATION

 

The Company’s Notes are fully and unconditionally and joint and severally guaranteed by certain of the Company’s direct and indirectly wholly-owned subsidiaries—namely, The Pep Boys Manny Moe & Jack of California, The Pep Boys—Manny Moe & Jack of Delaware, Inc. (the “Pep Boys of Delaware”); Pep Boys—Manny Moe & Jack of Puerto Rico, Inc.; Tire Stores Group Holding Corporation (on and after May 5, 2011); Big 10 Tire Stores, LLC (on and after May 5, 2011) and PBY Corporation (at and prior to January 29, 2011), (collectively, the “Subsidiary Guarantors”). The Notes are not guaranteed by the Company’s wholly owned subsidiary, Colchester Insurance Company.

 

The following consolidating information presents, in separate columns, the condensed consolidating balance sheets as of July 30, 2011 and January 29, 2011 and the related condensed consolidating statements of operations for the twenty-six weeks ended July 30, 2011 and July 31, 2010 and condensed consolidating statements of cash flows for the thirteen weeks ended July 30, 2011 and July 31, 2010 for (i) the Company (“Pep Boys”) on a parent only basis, with its investment in subsidiaries recorded under the equity method, (ii) the Subsidiary Guarantors on a combined basis, (iii) the subsidiary of the Company that does not guarantee the Notes, and (iv) the Company on a consolidated basis. The Company made an immaterial adjustment to the January 29, 2011 amounts reported for cash, intercompany receivables and intercompany liabilities to account for certain intercompany borrowing activity between Pep Boys and a subsidiary guarantor.

 

On January 29, 2011, The Pep Boys — Manny, Moe & Jack of Pennsylvania made a capital contribution of $264.0 million to Pep Boys of Delaware consisting of intercompany receivables due from the latter. This contribution resulted in an increase in the Pep Boys’ investment in subsidiaries and the Subsidiary Guarantors’ stockholders’ equity. On January 30, 2011, the Company merged PBY Corporation into Pep Boys of Delaware and accordingly, The Pep Boys Manny Moe & Jack of California became the wholly owned subsidiary of  Pep Boys of Delaware. This merger did not affect the presentation of the following condensed consolidating information.

 

On May 5, 2011, The Pep Boys — Manny, Moe & Jack acquired Tire Store Group Holdings Corporation and its subsidiary Big 10 Tire Stores, LLC. As a result of this acquisition, The Pep Boys—Manny, Moe & Jack of Pennsylvania increased its investment in subsidiaries by $9.4 million (see Note 3 - Acquisitions).

 

CONDENSED CONSOLIDATING BALANCE SHEET

(dollars in thousands)

(unaudited)

 

As of July 30, 2011

 

Pep Boys

 

Subsidiary
Guarantors

 

Subsidiary Non-
Guarantors

 

Consolidation/
Elimination

 

Consolidated

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

20,187

 

$

31,475

 

$

10,315

 

$

 

$

61,977

 

Accounts receivable, net

 

8,409

 

13,322

 

 

 

21,731

 

Merchandise inventories

 

194,605

 

389,692

 

 

 

584,297

 

Prepaid expenses

 

7,723

 

10,892

 

6,836

 

(5,757

)

19,694

 

Other current assets

 

872

 

879

 

54,049

 

(4,909

)

50,891

 

Total current assets

 

231,796

 

446,260

 

71,200

 

(10,666

)

738,590

 

Property and equipment—net

 

237,515

 

444,484

 

30,521

 

(18,778

)

693,742

 

Investment in subsidiaries

 

2,148,583

 

 

 

(2,148,583

)

 

Intercompany receivables

 

 

1,373,918

 

67,464

 

(1,441,382

)

 

Goodwill

 

2,549

 

46,035

 

 

 

48,584

 

Deferred income taxes

 

16,457

 

51,531

 

 

 

67,988