v2.4.0.6
Document and Entity Information
9 Months Ended
Oct. 27, 2012
Nov. 23, 2012
Document and Entity Information    
Entity Registrant Name PEP BOYS MANNY MOE & JACK  
Entity Central Index Key 0000077449  
Document Type 10-Q  
Document Period End Date Oct. 27, 2012  
Amendment Flag false  
Current Fiscal Year End Date --02-02  
Entity Current Reporting Status Yes  
Entity Filer Category Accelerated Filer  
Entity Common Stock, Shares Outstanding   53,100,876
Document Fiscal Year Focus 2012  
Document Fiscal Period Focus Q3  
v2.4.0.6
CONSOLIDATED BALANCE SHEETS (USD $)
In Thousands, unless otherwise specified
Oct. 27, 2012
Jan. 28, 2012
Current assets:    
Cash and cash equivalents $ 78,667 $ 58,244
Accounts receivable, less allowance for uncollectible accounts of $1,424 and $1,303 25,225 25,792
Merchandise inventories 634,252 614,136
Prepaid expenses 15,086 26,394
Other current assets 49,543 59,979
Total current assets 802,773 784,545
Property and equipment - net 665,529 696,339
Goodwill 46,917 46,917
Deferred income taxes 53,011 72,870
Other long-term assets 35,547 33,108
Total assets 1,603,777 1,633,779
Current liabilities:    
Accounts payable 258,222 243,712
Trade payable program liability 125,718 85,214
Accrued expenses 218,167 221,705
Deferred income taxes 65,429 66,208
Current maturities of long-term debt 2,000 1,079
Total current liabilities 669,536 617,918
Long-term debt less current maturities 198,000 294,043
Other long-term liabilities 63,536 77,216
Deferred gain from asset sales 130,820 140,273
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 295,086 296,462
Retained earnings 445,503 423,437
Accumulated other comprehensive loss (10,050) (17,649)
Treasury stock, at cost - 15,460,049 shares and 15,803,322 shares (257,211) (266,478)
Total stockholders' equity 541,885 504,329
Total liabilities and stockholders' equity $ 1,603,777 $ 1,633,779
v2.4.0.6
CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)
In Thousands, except Share data, unless otherwise specified
Oct. 27, 2012
Jan. 28, 2012
CONSOLIDATED BALANCE SHEETS    
Accounts receivable, allowance for uncollectible accounts (in dollars) $ 1,424 $ 1,303
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 15,460,049 15,803,322
v2.4.0.6
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended 9 Months Ended
Oct. 27, 2012
Oct. 29, 2011
Oct. 27, 2012
Oct. 29, 2011
Merchandise sales $ 401,146 $ 414,530 $ 1,226,858 $ 1,238,424
Service revenue 108,462 107,643 333,025 319,884
Total revenues 509,608 522,173 1,559,883 1,558,308
Costs of merchandise sales 284,626 292,397 863,533 865,446
Costs of service revenue 108,942 102,855 322,057 295,607
Total costs of revenues 393,568 395,252 1,185,590 1,161,053
Gross profit from merchandise sales 116,520 122,133 363,325 372,978
Gross (loss) profit from service revenue (480) 4,788 10,968 24,277
Total gross profit 116,040 126,921 374,293 397,255
Selling, general and administrative expenses 112,028 109,549 346,015 331,717
Net (loss) gain from dispositions of assets (221) (25) (232) 61
Operating profit 3,791 17,347 28,046 65,599
Merger termination fees, net (139)   42,816  
Other income 655 627 1,646 1,783
Interest expense 17,057 6,889 30,000 19,831
(Loss) earnings from continuing operations before income taxes and discontinued operations (12,750) 11,085 42,508 47,551
Income tax (benefit) expense (6,055) 4,063 15,035 14,232
(Loss) earnings from continuing operations before discontinued operations (6,695) 7,022 27,473 33,319
(Loss) income from discontinued operations, net of tax (64) (11) (122) 3
Net (loss) earnings (6,759) 7,011 27,351 33,322
Basic earnings per share:        
(Loss) earnings from continuing operations before discontinued operations $ (0.13) $ 0.13 $ 0.51 $ 0.63
Basic (loss) earnings per share (in dollars per share) $ (0.13) $ 0.13 $ 0.51 $ 0.63
Diluted earnings per share:        
(Loss) earnings from continuing operations before discontinued operations $ (0.13) $ 0.13 $ 0.51 $ 0.62
Diluted (loss) earnings per share (in dollars per share) $ (0.13) $ 0.13 $ 0.51 $ 0.62
Other comprehensive income:        
Defined benefit plan adjustment, net of tax 354 236 1,062 709
Derivative financial instruments adjustment, net of tax 4,607 907 6,537 1,592
Other comprehensive income 4,961 1,143 7,599 2,301
Comprehensive (loss) income $ (1,798) $ 8,154 $ 34,950 $ 35,623
v2.4.0.6
CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)
In Thousands, unless otherwise specified
9 Months Ended
Oct. 27, 2012
Oct. 29, 2011
Cash flows from operating activities:    
Net earnings $ 27,351 $ 33,322
Adjustments to reconcile net earnings to net cash provided by continuing operations:    
Net loss (income) from discontinued operations, net of tax 122 (3)
Depreciation and amortization 59,129 59,779
Amortization of deferred gain from asset sales (9,453) (9,451)
Stock compensation expense 622 2,539
Deferred income taxes 14,521 8,021
Net loss (gain) from disposition of assets 232 (61)
Loss from asset impairment 8,802 389
Other 88  
Changes in assets and liabilities, net of the effects of acquisitions:    
Decrease in accounts receivable, prepaid expenses and other 26,213 27,767
Increase in merchandise inventories (20,116) (34,874)
Increase in accounts payable 14,510 19,758
Decrease in accrued expenses (4,208) (18,693)
Decrease in other long-term liabilities (1,369) (3,483)
Net cash provided by continuing operations 116,444 85,010
Net cash (used in) provided by discontinued operations (215) 40
Net cash provided by operating activities 116,229 85,050
Cash flows from investing activities:    
Capital expenditures (36,760) (50,793)
Proceeds from dispositions of assets 15 89
Premiums paid on life insurance policies   (837)
Acquisitions, net of cash acquired   (42,901)
Collateral investment   (4,763)
Net cash used in investing activities (36,745) (99,205)
Cash flows from financing activities:    
Borrowings under line of credit agreements 1,780 5,181
Payments under line of credit agreements (1,780) (5,181)
Borrowings on trade payable program liability 123,408 97,400
Payments on trade payable program liability (82,904) (85,367)
Payment for finance issuance cost (6,442) (2,441)
Borrowings under new debt 200,000  
Debt payments (295,122) (809)
Dividends paid   (4,757)
Proceeds from stock issuance 1,999 605
Net cash (used in) provided by financing activities (59,061) 4,631
Net increase (decrease) in cash and cash equivalents 20,423 (9,524)
Cash and cash equivalents at beginning of period 58,244 90,240
Cash and cash equivalents at end of period 78,667 80,716
Supplemental disclosure of cash flow information:    
Cash paid for income taxes 2,635 1,015
Cash paid for interest 28,554 14,577
Non-cash investing activities:    
Accrued purchases of property and equipment $ 2,008 $ 1,486
v2.4.0.6
BASIS OF PRESENTATION
9 Months Ended
Oct. 27, 2012
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 28, 2012. The results of operations for the thirty-nine weeks ended October 27, 2012 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 October 27, 2012 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 2012 and 2011 refer to the fiscal year ending February 2, 2013 and the fiscal year ended January 28, 2012, respectively.

 

The Company operated 744 store locations at October 27, 2012, of which 232 were owned and 512 were leased.

 

v2.4.0.6
NEW ACCOUNTING STANDARDS
9 Months Ended
Oct. 27, 2012
NEW ACCOUNTING STANDARDS  
NEW ACCOUNTING STANDARDS

NOTE 2NEW ACCOUNTING STANDARDS

 

In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 adoption of ASU 2011-04 did not have a material impact on the Company’s 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 adoption of ASU 2011-05 affected presentation only and therefore did not have an impact on the Company’s consolidated financial condition, results of operations or cash flows.

 

In September 2011, the FASB issued ASU 2011-08, “Intangibles — Goodwill and Other (Topic 350) —Testing Goodwill for Impairment” (“ASU 2011-08”). The new guidance provides entities with the option to perform a qualitative assessment of whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount before applying the quantitative two-step goodwill impairment test. If an entity concludes that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, it would not be required to perform the quantitative two-step goodwill impairment test. Entities also have the option to bypass the assessment of qualitative factors for any reporting unit in any period and proceed directly to performing the first step of the quantitative two-step goodwill impairment test, as was required prior to the issuance of this new guidance. The new guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of ASU 2011-08 is not expected to have a material impact on the Company’s consolidated financial statements.

 

v2.4.0.6
ACQUISITIONS
9 Months Ended
Oct. 27, 2012
ACQUISITIONS  
ACQUISITIONS

NOTE 3ACQUISITIONS

 

During the thirty-nine weeks ended October 29, 2011, the Company made three separate acquisitions. 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 (unaudited) in sales annually based on 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 expensed all costs related to these acquisitions during fiscal 2011. The total costs related to these acquisitions were $1.5 million and are included in the consolidated statement of operations within selling, general and administrative expenses.

 

As the Company’s acquisitions (including Big 10) were immaterial to the Company’s operating results both individually and in aggregate for the thirteen and thirty-nine week periods ended October 29, 2011, pro forma results of operations are not disclosed. Sales for the fiscal 2011 acquired stores totaled $43.6 million and net earnings for those stores were break-even for the period from acquisition date through October 29, 2011.

 

In the third quarter of 2011, the Company recorded a reduction to the contingent consideration of $0.7 million related to one of the Company’s acquisitions. The reversal of contingent consideration was recorded to selling, general and administrative expenses in the consolidated statements of operations.

 

v2.4.0.6
MERCHANDISE INVENTORIES
9 Months Ended
Oct. 27, 2012
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 $572.1 million and $536.4 million as of October 27, 2012 and January 28, 2012, respectively.

 

The Company’s inventory, consisting primarily of automotive 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 $4.6 million at October 27, 2012 and January 28, 2012, respectively.

 

v2.4.0.6
PROPERTY AND EQUIPMENT
9 Months Ended
Oct. 27, 2012
PROPERTY AND EQUIPMENT  
PROPERTY AND EQUIPMENT

NOTE 5PROPERTY AND EQUIPMENT

 

The Company’s property and equipment as of October 27, 2012 and January 28, 2012 was as follows:

 

(dollar amounts in thousands)

 

October 27, 2012

 

January 28, 2012

 

 

 

 

 

 

 

Property and equipment

 

 

 

 

 

Land

 

$

204,023

 

$

204,023

 

Buildings and improvements

 

881,094

 

875,999

 

Furniture, fixtures and equipment

 

734,986

 

723,938

 

Construction in progress

 

4,082

 

3,279

 

Accumulated depreciation and amortization

 

(1,158,656

)

(1,110,900

)

Property and equipment — net

 

$

665,529

 

$

696,339

 

 

v2.4.0.6
WARRANTY RESERVE
9 Months Ended
Oct. 27, 2012
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 thirty-nine weeks ended October 27, 2012 and the fifty-two weeks ended January 28, 2012 is as follows:

 

(dollar amounts in thousands)

 

October 27, 2012

 

January 28, 2012

 

Beginning balance

 

$

673

 

$

673

 

 

 

 

 

 

 

Additions related to current period sales

 

7,603

 

12,122

 

 

 

 

 

 

 

Warranty costs incurred in current period

 

(7,485

)

(12,122

)

 

 

 

 

 

 

Ending balance

 

$

791

 

$

673

 

 

v2.4.0.6
DEBT AND FINANCING ARRANGEMENTS
9 Months Ended
Oct. 27, 2012
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)

 

October 27, 2012

 

January 28, 2012

 

7.5% Senior Subordinated Notes, due December 2014

 

$

 

$

147,565

 

Senior Secured Term Loan, due October 2013

 

 

147,557

 

Senior Secured Term Loan, due October 2018

 

200,000

 

 

Revolving Credit Agreement, through January 2016

 

 

 

Long-term debt

 

200,000

 

295,122

 

Current maturities

 

(2,000

)

(1,079

)

Long-term debt less current maturities

 

$

198,000

 

$

294,043

 

 

On October 11, 2012, the Company entered into the Second Amended and Restated Credit Agreement that (i) increased the size of the Company’s Senior Secured Term Loan (the “Term Loan”) to $200.0 million, (ii) extended the maturity of the Term Loan from October 27, 2013 to October 11, 2018, (iii) reset the interest rate under the Term Loan to the London Interbank Offered Rate (LIBOR), subject to a floor of 1.25%, plus 3.75% and (iv) added an additional 16 of the Company’s owned locations to the collateral pool securing the Term Loan.  The amended and restated Term Loan is deemed to be substantially different than the prior Term Loan, and therefore the modification of the debt has been treated as a debt extinguishment.  As of October 27, 2012, 142 stores collateralized the Term Loan. The Company recorded $6.4 million of deferred financing costs related to the Second Amended and Restated Credit Agreement.

 

Net proceeds from the amended and restated Term Loan together with cash on hand were used to settle the Company’s outstanding interest rate swap on the Term Loan as structured prior to its amendment and restatement and to satisfy and discharge all of the Company’s outstanding 7.5% Senior Subordinated Notes (“Notes”) due 2014.  The settlement of the interest rate swap resulted in the reclassification of $7.5 million of accumulated other comprehensive loss to interest expense.  In connection with the satisfaction and discharge of the Notes, the Company (i) prepaid the outstanding principal amount of the Notes together with $5.5 million in interest ($1.8 million of which was for the period from October 28, 2012 through December 15, 2012 and the remaining $3.7 million related to previously accrued interest) due through the redemption date by depositing such funds into an irrevocable escrow account with the trustee of the Notes and (ii) recognized, in interest expense, $1.9 million of deferred financing costs related to the Notes and the Term Loan as structured prior to its amendment and restatement. The interest payment and the swap settlement payment are presented within cash flows from operations on the consolidated statement of cash flows.

 

On October 11, 2012, the Company entered into two new interest rate swaps for a notional amount of $50.0 million each that together were designated as a cash flow hedge on the first $100.0 million of the Term Loan. The interest rate swaps convert the variable LIBOR portion of the interest payments due on the first $100.0 million of the Term Loan to a fixed rate of 1.855%.

 

The Company’s ability to borrow under its Revolving Credit Agreement is based on a specific borrowing base consisting of inventory and accounts receivable. The interest rate on this credit line is daily LIBOR plus 2.00% to 2.50% based upon the then current availability under the Revolving Credit Agreement. As of October 27, 2012, there were no outstanding borrowings under this agreement and $31.3 million of availability was utilized to support outstanding letters of credit. Taking this into account and the borrowing base requirements, as of October 27, 2012, there was $167.3 million of availability remaining under the Revolving Credit Agreement.

 

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 Revolving Credit Agreement plus unrestricted cash drops below $50.0 million. As of October 27, 2012, the Company was in compliance with all financial 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 obligations and are considered a level 2 measure under the fair value hierarchy. The estimated fair value of long-term debt including current maturities was $201.5 million and $293.6 million as of October 27, 2012 and January 28, 2012, respectively.

 

The Company has a vendor financing program with availability up to $175.0 million which is funded by various bank participants who have the ability, but not the obligation, to purchase account receivables owed by the Company directly from vendors. The Company, in turn, makes the regularly scheduled full vendor payments to the bank participants. There was an outstanding balance of $125.7 million and $85.2 million under the program as of October 27, 2012 and January 28, 2012, respectively.

 

v2.4.0.6
INCOME TAXES
9 Months Ended
Oct. 27, 2012
INCOME TAXES  
INCOME TAXES

NOTE 8INCOME 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’s effective income tax rate differs from the U.S. statutory rate principally due to deferred tax adjustments related to foreign tax credits generated in the Company’s Puerto Rico operations, state taxes, and other certain permanent tax items. The changes in the rate for the thirteen weeks ended October 27, 2012 as compared to the thirteen weeks ended October 29, 2011 are primarily driven by a reduction in ordinary income or loss in relation to foreign taxes in the Company’s Puerto Rico operations, state taxes, and other certain permanent tax items. 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. During the thirty-nine weeks ended October 29, 2011, due to an organizational restructuring of its subsidiaries and the Company’s improved profitability and projected future income, the Company released $3.6 million (net of federal tax) of valuation allowance relating to state net operating loss carryforwards and credits.

 

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 thirty-nine weeks ended October 27, 2012, the Company did not have a material change to its uncertain tax position liabilities.

 

v2.4.0.6
ACCUMULATED OTHER COMPREHENSIVE LOSS
9 Months Ended
Oct. 27, 2012
ACCUMULATED OTHER COMPREHENSIVE LOSS  
ACCUMULATED OTHER COMPREHENSIVE LOSS

NOTE 9ACCUMULATED OTHER COMPREHENSIVE LOSS

 

The components of accumulated other comprehensive loss are:

 

(dollar amounts in thousands)

 

October 27, 2012

 

January 28, 2012

 

 

 

 

 

 

 

Defined benefit plan adjustment, net of tax

 

$

(8,635

)

$

(9,696

)

Derivative financial instrument adjustment, net of tax

 

(1,415

)

(7,953

)

Accumulated other comprehensive loss

 

$

(10,050

)

$

(17,649

)

 

During the third quarter of fiscal 2012, the Company refinanced its existing Term Loan and settled the outstanding interest rate swap resulting in a reclassification of $7.5 million from accumulated other comprehensive loss into interest expense.

 

v2.4.0.6
IMPAIRMENTS
9 Months Ended
Oct. 27, 2012
IMPAIRMENTS  
IMPAIRMENTS

NOTE 10—IMPAIRMENTS

 

During the third quarter of fiscal 2012, the Company recorded a $8.8 million impairment charge related to 35 stores classified as held and used. Of the $8.8 million impairment charge, $4.2 million was charged to costs of merchandise sales, and $4.6 million was charged to costs of service revenue.  In the second quarter of fiscal 2011, the Company recorded a $0.4 million impairment charge related to stores classified as held and used. Of the $0.4 million impairment charge, $0.1 million was charged to costs of merchandise sales, and $0.3 million was charged to costs of service revenue. In both periods, the Company used a probability-weighted approach and estimates of expected future cash flows to determine the fair value of these stores. Discount and growth rate assumptions were derived from current economic conditions, management’s expectations and projected trends of current operating results. The remaining fair value of the impaired stores is approximately $1.5 million and is classified as a Level 2 or 3 measure within the fair value hierarchy.

 

v2.4.0.6
EARNINGS PER SHARE
9 Months Ended
Oct. 27, 2012
EARNINGS PER SHARE  
EARNINGS PER SHARE

NOTE 11EARNINGS 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

 

Thirty-nine Weeks Ended

 

(in thousands, except per share amounts)

 

October 27,
2012

 

October 29,
2011

 

October 27,
2012

 

October 29,
2011

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)

 

(Loss) earnings from continuing operations

 

$

(6,695

)

$

7,022

 

$

27,473

 

$

33,319

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) income from discontinued operations, net of tax

 

(64

)

(11

)

(122

)

3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) earnings

 

$

(6,759

)

$

7,011

 

$

27,351

 

$

33,322

 

 

 

 

 

 

 

 

 

 

 

 

 

(b)

 

Basic average number of common shares outstanding during period

 

53,304

 

52,998

 

53,175

 

52,933

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

600

 

768

 

661

 

 

 

 

 

 

 

 

 

 

 

 

 

(c)

 

Diluted average number of common shares assumed outstanding during period

 

53,304

 

53,598

 

53,943

 

53,594

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share:

 

 

 

 

 

 

 

 

 

 

 

(Loss) earnings from continuing operations (a/b)

 

$

(0.13

)

$

0.13

 

$

0.51

 

$

0.63

 

 

 

Discontinued operations, net of tax

 

 

 

 

 

 

 

Basic (loss) earnings per share

 

$

(0.13

)

$

0.13

 

$

0.51

 

$

0.63

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

 

 

 

 

 

 

(Loss) earnings from continuing operations (a/c)

 

$

(0.13

)

$

0.13

 

$

0.51

 

$

0.62

 

 

 

Discontinued operations, net of tax

 

 

 

 

 

 

 

Diluted (loss) earnings per share

 

$

(0.13

)

$

0.13

 

$

0.51

 

$

0.62

 

 

At October 27, 2012 and October 29, 2011, respectively, there were 2,571,000 and 2,640,000 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 number of such shares excluded from the diluted earnings per share calculation are 740,494 and 904,000 for the thirty-nine weeks ended October 27, 2012 and October 29, 2011, respectively. The total number of such shares excluded from the diluted earnings per share calculation are 2,571,000 and 1,050,000 for the thirteen weeks ended October 27, 2012 and October 29, 2011, respectively.

 

v2.4.0.6
BENEFIT PLANS
9 Months Ended
Oct. 27, 2012
BENEFIT PLANS  
BENEFIT PLANS

NOTE 12BENEFIT 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 contributions to these plans for fiscal 2012 are contingent upon meeting certain performance metrics. The Company did not record any contribution expense for these plans in the first nine months of 2012 or 2011.

 

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

 

 

 

Thirteen Weeks Ended

 

Thirty-nine Weeks Ended

 

(dollar amounts in thousands)

 

October 27, 2012

 

October 29, 2011

 

October 27, 2012

 

October 29, 2011

 

 

 

 

 

 

 

 

 

 

 

Interest cost

 

619

 

640

 

1,857

 

1,918

 

Expected return on plan assets

 

(704

)

(686

)

(2,112

)

(2,058

)

Amortization of net loss

 

566

 

378

 

1,699

 

1,134

 

Net periodic benefit cost

 

$

481

 

$

332

 

$

1,444

 

$

994

 

 

The Plan is subject to minimum funding requirements of the Employee Retirement Income Security Act of 1974 as amended. While the Company had no minimum funding requirement during fiscal 2011, it made a $3.0 million discretionary contribution to the Plan on April 28, 2011. There were no discretionary contributions made during the thirty-nine weeks ended October 27, 2012.

 

During the third quarter of fiscal 2011, the Company began the process of terminating the Plan. The termination of the Plan is expected to be completed by the end of fiscal 2012. In order to terminate the Plan, in accordance with Internal Revenue Service and Pension Benefit Guaranty Corporation requirements, the Company is required to fully fund the Plan on a termination basis and will commit to contribute the additional assets necessary to do so. The Company expects to contribute approximately $14.0 million to fully fund the Plan. On November 29, 2012, the Plan transferred $22.7 million to the Plan administrator to pay participants who elected the temporary lump sum benefit. The Company will purchase annuities to satisfy all remaining obligations under the Plan during the fourth quarter of fiscal 2012. Plan participants will not be adversely affected by the Plan termination, but rather will have their benefits either converted into a lump sum cash payment or an annuity contract placed with an insurance carrier.

 

v2.4.0.6
EQUITY COMPENSATION PLANS
9 Months Ended
Oct. 27, 2012
EQUITY COMPENSATION PLANS  
EQUITY COMPENSATION PLANS

NOTE 13EQUITY 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.

 

STOCK OPTIONS

 

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

 

 

 

Number of Shares

 

Outstanding — January 28, 2012

 

2,008,430

 

Granted

 

287,574

 

Exercised

 

(247,553

)

Forfeited

 

(36,225

)

Expired

 

(274,216

)

Outstanding — October 27, 2012

 

1,738,010

 

 

In the first nine months of fiscal year 2012, the Company granted approximately 288,000 stock options with a weighted average grant date fair value of $4.65. These options have a seven-year term and vest over a three-year period with a third vesting on each of the first three anniversaries of their grant date. The compensation expense recorded during the thirteen weeks and thirty-nine weeks ended October 27, 2012, for the options granted was immaterial.

 

In the first nine months 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 first three anniversaries of their grant date. The compensation expense recorded during the thirteen weeks and thirty-nine weeks ended October 29, 2011, for the options granted was immaterial.

 

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:

 

 

 

October 27, 2012

 

October 29, 2011

 

Dividend yield

 

0.0

%

1.0

%

Expected volatility

 

57.7

%

58.2

%

Risk-free interest rate range:

 

 

 

 

 

High

 

0.6

%

1.9

%

 

Low

 

0.5

%

1.6

%

Ranges of expected lives in years

 

4 - 5

 

4 - 5

 

 

RESTRICTED STOCK UNITS

 

Performance Based Awards

 

In the third quarter of fiscal 2012, the Company granted approximately 106,000 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 2014. 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 2014. The fair value for these awards was $9.98 per unit at the date of the grant. The compensation expense recorded for these restricted stock units was immaterial during the thirteen weeks and thirty-nine weeks ended October 27, 2012.

 

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 per unit at the date of the grant. The compensation expense recorded for these restricted stock units during the thirteen weeks and thirty-nine weeks ended October 29, 2011 was immaterial.

 

In the third quarter of fiscal 2012, the Company concluded that it is not likely to achieve the financial targets for the performance based awards granted in fiscal 2010 and 2011 and accordingly, recorded a $0.9 million benefit to reverse the to-date compensation expense recognized for these awards.

 

Market Based Awards

 

In the third quarter of fiscal 2012, the Company granted approximately 53,000 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 for the three-year period ending with fiscal 2014. 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 $7.96 per unit grant date fair value. The compensation expense recorded for these restricted stock units during the thirteen weeks and thirty-nine weeks ended October 27, 2012, was immaterial.

 

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 for the three-year period ending with 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 per unit grant date fair value. The compensation expense recorded for these restricted stock units during the thirteen weeks and thirty-nine weeks ended October 29, 2011, was immaterial.

 

Other Awards

 

The Company did not grant any restricted stock units for officers’ deferred bonus matches under the Company’s non-qualified deferred compensation plan during fiscal 2012. In the first quarter of fiscal 2011, the Company granted approximately 50,000 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. The fair value of the fiscal 2011 awards was $13.68 and the compensation expense recorded for these awards during the thirteen weeks and thirty-nine weeks ended October 29, 2011, was immaterial.

 

In the third quarter of fiscal 2012, the Company granted approximately 33,000 restricted stock units to its non-employee directors of the board, which vest over a one year period with a quarter vesting on each of the first four quarters following their grant date. The fair value was $9.98 per unit and the compensation expense recorded for these restricted stock units during the thirteen weeks and thirty-nine weeks ended October 27, 2012, was immaterial.  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 compensation expense recorded for these awards during the thirteen weeks and thirty-nine weeks ended October 27, 2012, was immaterial.

 

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 28, 2012

 

626,747

 

Granted

 

319,082

 

Forfeited

 

(69,180

)

Vested

 

(43,216

)

Nonvested — October 27, 2012

 

833,433

 

 

v2.4.0.6
FAIR VALUE MEASUREMENTS AND DERIVATIVES
9 Months Ended
Oct. 27, 2012
FAIR VALUE MEASUREMENTS AND DERIVATIVES  
FAIR VALUE MEASUREMENTS AND DERIVATIVES

NOTE 14FAIR VALUE MEASUREMENTS AND DERIVATIVES

 

The Company’s fair value measurements consist of (a) 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 non-recurring non-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

 

October 27, 2012

 

Level 1

 

Level 2

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

78,667

 

$

78,667

 

$

 

$

 

Collateral investments (1)

 

17,276

 

17,276

 

 

 

Rabbi trust assets (1)

 

3,654

 

 

3,654

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Other liabilities

 

 

 

 

 

 

 

 

 

Derivative liability (2)

 

2,266

 

 

2,266

 

 

 

(dollar amounts in thousands)

 

Fair Value
at

 

Fair Value Measurements
Using Inputs Considered as

 

Description

 

January 28, 2012

 

Level 1

 

Level 2

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

58,244

 

$

58,244

 

$

 

$

 

Collateral investments (1)

 

17,276

 

17,276

 

 

 

Rabbi trust assets (1) 

 

3,576

 

 

3,576

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Other liabilities

 

 

 

 

 

 

 

 

 

Derivative liability (2)

 

12,540

 

 

12,540

 

 

 

(1) included in other long-term assets

(2) included in other long-term liabilities

 

As of January 28, 2012 the Company invested $17.3 million in restricted accounts as collateral for its retained liabilities included within existing insurance programs in lieu of previously outstanding letters of credit.

 

On October 11, 2012, the Company settled its interest rate swap designated as a cash flow hedge on $145.0 million of the Company’s Term Loan prior to its amendment and restatement. The swap was 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 settlement of this swap resulted in an interest charge of $7.5 million, which was previously recorded within accumulated other comprehensive loss.

 

On October 11, 2012, the Company entered into two new interest rate swaps for a notional amount of $50.0 million each that together were designated as a cash flow hedge on the first $100.0 million of the amended and restated Term Loan. The interest rate swaps convert the variable LIBOR portion of the interest payments due on the first $100.0 million of the Term Loan to a fixed rate of 1.855%.

 

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

 

(dollar amounts in thousands)

 

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

 

Earnings Statement
Classification

 

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

 

Thirteen weeks ended October 27, 2012

 

$

(170

)

Interest expense

 

$

(1,201

)

Thirteen weeks ended October 29, 2011

 

$

890

 

Interest expense

 

$

(1,751

)

Thirty-nine weeks ended October 27, 2012

 

$

1,734

 

Interest expense

 

$

(4,540

)

Thirty-nine weeks ended October 29, 2011

 

$

1,538

 

Interest expense

 

$

(5,242

)

 

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

 

The fair value of the derivatives was $2.3 million and $12.5 million payable at October 27, 2012 and January 28, 2012, respectively. Of the $10.2 million decrease in the fair value during the thirty-nine weeks ended October 27, 2012, $1.7 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 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.

 

v2.4.0.6
LEGAL MATTERS
9 Months Ended
Oct. 27, 2012
LEGAL MATTERS  
LEGAL MATTERS

NOTE 15LEGAL 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.

 

v2.4.0.6
MERGER UPDATE
9 Months Ended
Oct. 27, 2012
MERGER UPDATE  
MERGER UPDATE

NOTE 16MERGER UPDATE

 

On May 29, 2012, the Company, Auto Acquisition Company, LLC, a Delaware limited liability company (“Parent”), Auto Mergersub, Inc., a Delaware corporation (“Merger Sub”), and The Gores Group, LLC, a Delaware limited liability company (“Gores”), entered into a Settlement Agreement (the “Settlement Agreement”) relating to the previously announced Agreement and Plan of Merger, dated as of January 29, 2012, by and among the Company, Parent and Merger Sub (the “Merger Agreement”). The Settlement Agreement provided for, among other things: (i) the termination of the Merger Agreement and the related financing commitments from Gores Capital Partners II, L.P. and Gores Capital Partners III, L.P.; (ii) Parent’s payment of a $50.0 million fee to the Company and reimbursement to the Company for certain of its merger related expenses; and (iii) mutual releases of the parties. Such payments were made by Parent on June 8, 2012 and the Company recorded $42.8 million of merger termination fees, net of related expenses, on the consolidated statements of operations and comprehensive income which is presented within cash flows from operations on the consolidated statement of cash flows.

v2.4.0.6
PROPERTY AND EQUIPMENT (Tables)
9 Months Ended
Oct. 27, 2012
PROPERTY AND EQUIPMENT  
Schedule of property and equipment

 

(dollar amounts in thousands)

 

October 27, 2012

 

January 28, 2012

 

 

 

 

 

 

 

Property and equipment

 

 

 

 

 

Land

 

$

204,023

 

$

204,023

 

Buildings and improvements

 

881,094

 

875,999

 

Furniture, fixtures and equipment

 

734,986

 

723,938

 

Construction in progress

 

4,082

 

3,279

 

Accumulated depreciation and amortization

 

(1,158,656

)

(1,110,900

)

Property and equipment — net

 

$

665,529

 

$

696,339

 

 

v2.4.0.6
WARRANTY RESERVE (Tables)
9 Months Ended
Oct. 27, 2012
WARRANTY RESERVE  
Schedule of reserve for warranty cost activity

 

(dollar amounts in thousands)

 

October 27, 2012

 

January 28, 2012

 

Beginning balance

 

$

673

 

$

673

 

 

 

 

 

 

 

Additions related to current period sales

 

7,603

 

12,122

 

 

 

 

 

 

 

Warranty costs incurred in current period

 

(7,485

)

(12,122

)

 

 

 

 

 

 

Ending balance

 

$

791

 

$

673

 

 

v2.4.0.6
DEBT AND FINANCING ARRANGEMENTS (Tables)
9 Months Ended
Oct. 27, 2012
DEBT AND FINANCING ARRANGEMENTS  
Schedule of debt and financing arrangements

 

(dollar amounts in thousands)

 

October 27, 2012

 

January 28, 2012

 

7.5% Senior Subordinated Notes, due December 2014

 

$

 

$

147,565

 

Senior Secured Term Loan, due October 2013

 

 

147,557

 

Senior Secured Term Loan, due October 2018

 

200,000

 

 

Revolving Credit Agreement, through January 2016

 

 

 

Long-term debt

 

200,000

 

295,122

 

Current maturities

 

(2,000

)

(1,079

)

Long-term debt less current maturities

 

$

198,000

 

$

294,043

 

 

v2.4.0.6
ACCUMULATED OTHER COMPREHENSIVE LOSS (Tables)
9 Months Ended
Oct. 27, 2012
ACCUMULATED OTHER COMPREHENSIVE LOSS  
Schedule of accumulated other comprehensive loss

 

(dollar amounts in thousands)

 

October 27, 2012

 

January 28, 2012

 

 

 

 

 

 

 

Defined benefit plan adjustment, net of tax

 

$

(8,635

)

$

(9,696

)

Derivative financial instrument adjustment, net of tax

 

(1,415

)

(7,953

)

Accumulated other comprehensive loss

 

$

(10,050

)

$

(17,649

)

 

v2.4.0.6
EARNINGS PER SHARE (Tables)
9 Months Ended
Oct. 27, 2012
EARNINGS PER SHARE  
Schedule of calculation of basic and diluted earnings per share

 

 

 

Thirteen Weeks Ended

 

Thirty-nine Weeks Ended

 

(in thousands, except per share amounts)

 

October 27,
2012

 

October 29,
2011

 

October 27,
2012

 

October 29,
2011

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)

 

(Loss) earnings from continuing operations

 

$

(6,695

)

$

7,022

 

$

27,473

 

$

33,319

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) income from discontinued operations, net of tax

 

(64

)

(11

)

(122

)

3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) earnings

 

$

(6,759

)

$

7,011

 

$

27,351

 

$

33,322

 

 

 

 

 

 

 

 

 

 

 

 

 

(b)

 

Basic average number of common shares outstanding during period

 

53,304

 

52,998

 

53,175

 

52,933