v2.4.0.6
Document and Entity Information
3 Months Ended
May 04, 2013
May 31, 2013
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 May 04, 2013  
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   53,191,927
Document Fiscal Year Focus 2013  
Document Fiscal Period Focus Q1  
v2.4.0.6
CONSOLIDATED BALANCE SHEETS (USD $)
In Thousands, unless otherwise specified
May 04, 2013
Feb. 02, 2013
Current assets:    
Cash and cash equivalents $ 56,116 $ 59,186
Accounts receivable, less allowance for uncollectible accounts of $1,230 and $1,302 25,215 23,897
Merchandise inventories 648,148 641,208
Prepaid expenses 29,135 28,908
Other current assets 59,048 60,438
Total current assets 817,662 813,637
Property and equipment, net of accumulated depreciation of $1,183 and $1,163 647,636 657,270
Goodwill 46,917 46,917
Deferred income taxes 46,303 47,691
Other long-term assets 37,410 38,434
Total assets 1,595,928 1,603,949
Current liabilities:    
Accounts payable 245,193 244,696
Trade payable program liability 149,387 149,718
Accrued expenses 229,452 232,277
Deferred income taxes 53,481 58,441
Current maturities of long-term debt 2,000 2,000
Total current liabilities 679,513 687,132
Long-term debt less current maturities 197,500 198,000
Other long-term liabilities 52,202 53,818
Deferred gain from asset sales 124,276 127,427
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 295,059 295,679
Retained earnings 433,734 430,148
Accumulated other comprehensive loss (867) (980)
Treasury stock, at cost - 15,365,117 shares and 15,431,298 shares (254,046) (255,832)
Total stockholders' equity 542,437 537,572
Total liabilities and stockholders' equity $ 1,595,928 $ 1,603,949
v2.4.0.6
CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)
In Thousands, except Share data, unless otherwise specified
May 04, 2013
Feb. 02, 2013
CONSOLIDATED BALANCE SHEETS    
Accounts receivable, allowance for uncollectible accounts (in dollars) $ 1,230 $ 1,302
Property and equipment, accumulated depreciation $ 1,183 $ 1,163
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 15,365,117 15,431,298
v2.4.0.6
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended
May 04, 2013
Apr. 28, 2012
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME    
Merchandise sales $ 417,150 $ 412,332
Service revenue 119,023 112,272
Total revenues 536,173 524,604
Costs of merchandise sales 296,857 290,856
Costs of service revenue 117,476 106,096
Total costs of revenues 414,333 396,952
Gross profit from merchandise sales 120,293 121,476
Gross profit from service revenue 1,547 6,176
Total gross profit 121,840 127,652
Selling, general and administrative expenses 118,203 119,710
Net loss from dispositions of assets (116) (2)
Operating profit 3,521 7,940
Non-operating income 378 470
Interest expense 3,679 6,516
Earnings from continuing operations before income taxes and discontinued operations 220 1,894
Income tax (benefit) expense (3,708) 760
Earnings from continuing operations before discontinued operations 3,928 1,134
Loss from discontinued operations, net of tax (65) (72)
Net earnings 3,863 1,062
Basic earnings per share:    
Earnings from continuing operations before discontinued operations (in dollars per share) $ 0.07 $ 0.02
Basic earnings per share (in dollars per share) $ 0.07 $ 0.02
Diluted earnings per share:    
Earnings from continuing operations before discontinued operations (in dollars per share) $ 0.07 $ 0.02
Diluted earnings per share (in dollars per share) $ 0.07 $ 0.02
Other comprehensive income:    
Defined benefit plan adjustment, net of tax   354
Derivative financial instruments adjustment, net of tax 113 1,020
Other comprehensive income 113 1,374
Comprehensive income $ 3,976 $ 2,436
v2.4.0.6
CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)
In Thousands, unless otherwise specified
3 Months Ended
May 04, 2013
Apr. 28, 2012
Cash flows from operating activities:    
Net earnings $ 3,863 $ 1,062
Adjustments to reconcile net earnings to net cash provided by continuing operations:    
Loss from discontinued operations, net of tax 65 72
Depreciation 20,857 19,938
Amortization of deferred gain from asset sales (3,151) (3,163)
Amortization of deferred financing costs 563 633
Stock compensation expense 869 652
Deferred income taxes (3,872) 719
Net loss from disposition of assets 116 2
Loss from asset impairment 1,183  
Other (44) (22)
Changes in operating assets and liabilities:    
(Increase) decrease in accounts receivable, prepaid expenses and other (699) 6,428
Increase in merchandise inventories (6,940) (13,178)
Increase in accounts payable 262 18,122
(Decrease) increase in accrued expenses (2,211) 6,385
(Decrease) increase in other long-term liabilities (1,338) 466
Net cash provided by continuing operations 9,523 38,116
Net cash used in discontinued operations (88) (106)
Net cash provided by operating activities 9,435 38,010
Cash flows from investing activities:    
Capital expenditures (12,840) (11,940)
Proceeds from dispositions of assets 2  
Release of collateral investment 1,000  
Net cash used in investing activities (11,838) (11,940)
Cash flows from financing activities:    
Borrowings under line of credit agreements 590 524
Payments under line of credit agreements (590) (524)
Borrowings on trade payable program liability 46,181 42,722
Payments on trade payable program liability (46,512) (27,522)
Debt payments (500) (270)
Proceeds from stock issuance 164 195
Net cash (used in) provided by financing activities (667) 15,125
Net (decrease) increase in cash and cash equivalents (3,070) 41,195
Cash and cash equivalents at beginning of period 59,186 58,244
Cash and cash equivalents at end of period 56,116 99,439
Supplemental disclosure of cash flow information:    
Cash paid for income taxes 1,430 1,227
Cash received from income tax refunds 51  
Cash paid for interest 2,987 2,940
Non-cash investing activities:    
Accrued purchases of property and equipment $ 1,055 $ 1,970
v2.4.0.6
BASIS OF PRESENTATION
3 Months Ended
May 04, 2013
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 February 2, 2013. The results of operations for the thirteen weeks ended May 4, 2013 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 May 4, 2013 and for all periods presented have been made.  Certain prior period amounts have been reclassified to conform to current period presentation. These reclassifications had no effect on reported totals for assets, liabilities, shareholders’ equity, cash flows or net income.

 

The Company’s fiscal year ends on the Saturday nearest to January 31.  Fiscal 2013, which ends February 1, 2014, is comprised of 52 weeks.  Fiscal 2012, which ended February 2, 2013, was comprised of 53 weeks.

 

The Company operated 763 store locations at May 4, 2013, of which 232 were owned and 531 were leased.

v2.4.0.6
NEW ACCOUNTING STANDARDS
3 Months Ended
May 04, 2013
NEW ACCOUNTING STANDARDS  
NEW ACCOUNTING STANDARDS

NOTE 2NEW ACCOUNTING STANDARDS

 

In February 2013, the FASB issued ASU No. 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income” (“ASU 2013-02”), which requires companies to provide information about the amounts reclassified out of accumulated other comprehensive income (“AOCI”) by component. In addition, companies are required to report significant amounts reclassified out of AOCI by the respective line items of net income if the amount reclassified is required to be reclassified to net income in its entirety in the same reporting period. For amounts that are not required to be reclassified in their entirety to net income, companies are required to cross-reference to other disclosures that provide additional detail on those amounts. ASU 2013-02 does not change the current requirements for reporting net income or other comprehensive income in the financial statements, and is effective prospectively for reporting periods beginning after December 15, 2012. The adoption of ASU 2013-02 did not have a material impact on the Company’s consolidated financial condition, results of operations or cash flows.

v2.4.0.6
MERCHANDISE INVENTORIES
3 Months Ended
May 04, 2013
MERCHANDISE INVENTORIES  
MERCHANDISE INVENTORIES

NOTE 3MERCHANDISE 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 $570.2 million and $565.8 million as of May 4, 2013 and February 2, 2013, respectively.

 

The Company’s inventory, consisting primarily of automotive tires, 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 $4.9 million and $4.6 million as of May 4, 2013 and February 2, 2013, respectively.

v2.4.0.6
WARRANTY RESERVE
3 Months Ended
May 04, 2013
WARRANTY RESERVE  
WARRANTY RESERVE

NOTE 4WARRANTY 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 thirteen weeks ended May 4, 2013 and the fifty-three weeks ended February 2, 2013 is as follows:

 

(dollar amounts in thousands)

 

May 4, 2013

 

February 2, 2013

 

Beginning balance

 

$

864

 

$

673

 

 

 

 

 

 

 

Additions related to current period sales

 

3,402

 

11,920

 

 

 

 

 

 

 

Warranty costs incurred in current period

 

(3,361

)

(11,729

)

 

 

 

 

 

 

Ending balance

 

$

905

 

$

864

 

v2.4.0.6
DEBT AND FINANCING ARRANGEMENTS
3 Months Ended
May 04, 2013
DEBT AND FINANCING ARRANGEMENTS  
DEBT AND FINANCING ARRANGEMENTS

NOTE 5DEBT AND FINANCING ARRANGEMENTS

 

The following are the components of debt and financing arrangements:

 

(dollar amounts in thousands)

 

May 4, 2013

 

February 2, 2013

 

Senior Secured Term Loan, due October 2018

 

$

199,500

 

$

200,000

 

Revolving Credit Agreement, through July 2016

 

 

 

Long-term debt

 

199,500

 

200,000

 

Current maturities

 

(2,000

)

(2,000

)

Long-term debt less current maturities

 

$

197,500

 

$

198,000

 

 

The Company has a Revolving Credit Agreement (the “Agreement”) with available borrowings up to $300.0 million and a maturity of July 2016.  As of May 4, 2013, the Company had no borrowings outstanding under the Agreement and $34.7 million of availability was utilized to support outstanding letters of credit. Taking this into account and the borrowing base requirements (including reduction for amounts outstanding under the vendor financing program), as of May 4, 2013 there was $144.8 million of availability remaining under the 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 May 4, 2013, the Company was in compliance with all financial covenants contained in its debt agreements.

 

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 $149.4 million and $149.7 million under the program as of May 4, 2013 and February 2, 2013, respectively.

 

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 $202.2 million and $203.5 million as of May 4, 2013 and February 2, 2013, respectively.

v2.4.0.6
INCOME TAXES
3 Months Ended
May 04, 2013
INCOME TAXES  
INCOME TAXES

NOTE 6—INCOME 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 foreign taxes related to the Company’s Puerto Rico operations, state taxes, and certain other permanent tax items. The change in the rate for the thirteen weeks ended May 4, 2013 as compared to the thirteen weeks ended April 28, 2012 was primarily driven by a $3.8 million tax benefit due to non-expiring state hiring credits recorded in the first quarter of 2013, the cash benefit of which is not expected to be utilized within the next 12 months.

 

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 weeks ended May 4, 2013, there were no material changes to the Company’s liability for uncertain tax positions.

v2.4.0.6
EARNINGS PER SHARE
3 Months Ended
May 04, 2013
EARNINGS PER SHARE  
EARNINGS PER SHARE

NOTE 7EARNINGS 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

 

(dollar amounts in thousands, except per share amounts)

 

May 4, 2013

 

April 28, 2012

 

(a)

Earnings from continuing operations

 

$

3,928

 

$

1,134

 

 

 

 

 

 

 

 

 

Loss from discontinued operations, net of tax

 

(65

)

(72

)

 

 

 

 

 

 

 

 

Net earnings

 

$

3,863

 

$

1,062

 

 

 

 

 

 

 

 

(b)

Basic average number of common shares outstanding during period

 

53,388

 

53,071

 

 

 

 

 

 

 

 

 

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

 

603

 

878

 

 

 

 

 

 

 

 

(c)

Diluted average number of common shares assumed outstanding during period

 

53,991

 

53,949

 

 

 

 

 

 

 

 

 

Basic earnings per share:

 

 

 

 

 

 

Earnings from continuing operations (a/b)

 

$

0.07

 

$

0.02

 

 

Discontinued operations, net of tax

 

 

 

 

Basic earnings per share

 

$

0.07

 

$

0.02

 

 

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

 

Earnings from continuing operations (a/c)

 

$

0.07

 

$

0.02

 

 

Discontinued operations, net of tax

 

 

 

 

Diluted earnings per share

 

$

0.07

 

$

0.02

 

 

As of May 4, 2013 and April 28, 2012, respectively, there were 2,946,000 and 2,654,000 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 is 1,236,000 and 299,000 for the thirteen weeks ended May 4, 2013 and April 28, 2012, respectively.

v2.4.0.6
ACCUMULATED OTHER COMPREHENSIVE LOSS
3 Months Ended
May 04, 2013
ACCUMULATED OTHER COMPREHENSIVE LOSS  
ACCUMULATED OTHER COMPREHENSIVE LOSS

NOTE 8ACCUMULATED OTHER COMPREHENSIVE LOSS

 

The following table presents changes in accumulated other comprehensive loss for the thirteen weeks ended May 4, 2013, net of tax:

 

(dollar amounts in thousands)

 

Gains and
Losses on Cash Flow
Hedges

 

Beginning balance

 

$

980

 

 

 

 

 

Other comprehensive income before reclassifications, net of $12 tax

 

(22

)

Amounts reclassified from accumulated other comprehensive loss, net of $55 tax (a)

 

(91

)

Net current-period other comprehensive income

 

(113

)

 

 

 

 

Ending balance

 

$

867

 

 

(a)              Reclassified amount increased interest expense.

v2.4.0.6
BENEFIT PLANS
3 Months Ended
May 04, 2013
BENEFIT PLANS  
BENEFIT PLANS

NOTE 9BENEFIT PLANS

 

The Company maintains a non-qualified defined contribution Supplemental Executive Retirement Plan (the “Account Plan”) for key employees designated by the Board of Directors. For fiscal 2013, contributions to the Account Plan are contingent upon meeting certain performance metrics. During the first quarter of fiscal 2013, contributions to the Account Plan were $0.3 million.  The Company also 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 contributes the lesser of 50% of the first 6% of a participant’s contributions or 3% of the participant’s compensation under both savings plans.  During the first quarter of fiscal 2013, employer 401(k) contribution expense was $0.8 million.  The Company’s contributions to the Account Plan and the 401(k) plans for fiscal 2012 were contingent upon meeting certain performance metrics. The Company did not record any contribution expense for these plans in fiscal 2012.

 

In fiscal 2011, the Company began the process to terminate its defined benefit pension plan. During the fourth quarter of fiscal 2012, the Company contributed $14.1 million to fully fund the plan on a termination basis.  Accordingly, the Company has no ongoing pension expense, including in the first quarter of fiscal 2013.

 

Pension expense for the first quarter of fiscal 2012 was as follows:

 

 

 

Thirteen weeks ended

 

(dollar amounts in thousands)

 

April 28, 2012

 

Interest cost

 

$

619

 

Expected return on plan assets

 

(704

)

Amortization of net loss

 

566

 

Net periodic benefit cost

 

$

481

 

v2.4.0.6
EQUITY COMPENSATION PLANS
3 Months Ended
May 04, 2013
EQUITY COMPENSATION PLANS  
EQUITY COMPENSATION PLANS

NOTE 10—EQUITY 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 options activity under the Company’s plans for the thirteen weeks ended May 4, 2013:

 

 

 

Number of Shares

 

Outstanding — beginning balance

 

1,678,593

 

Granted

 

308,963

 

Exercised

 

(3,418

)

Forfeited

 

(3,331

)

Expired

 

(9,855

)

Outstanding — ending balance

 

1,970,952

 

 

In the first quarter of fiscal 2013, the Company granted approximately 309,000 stock options with a weighted average grant date fair value of $5.11 per unit.  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 ended May 4, 2013 for the options granted was immaterial.  There were no options issued in the prior year first quarter.

 

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:

 

 

 

May 4,
2013

 

Dividend yield

 

0.0

%

Expected volatility

 

52.5

%

Risk-free interest rate range:

 

 

 

High

 

0.73

%

Low

 

0.67

%

Ranges of expected lives in years

 

4 - 5

 

 

RESTRICTED STOCK UNITS

 

Performance Based Awards

 

In the first quarter of fiscal 2013, the Company granted approximately 109,000 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 2015. 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 2015. The fair value for these awards was $11.85 per unit at the date of the grant. The compensation expense recorded for these restricted stock units was immaterial during the thirteen weeks ended May 4, 2013.  There were no performance based award grants in the prior year first quarter.

 

Market Based Awards

 

In the first quarter of fiscal 2013, the Company granted approximately 55,000 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 2015. 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 $13.41 per unit grant date fair value. The compensation expense recorded for these restricted stock units during the thirteen weeks ended May 4, 2013 was immaterial.  There were no market based award grants in the prior year first quarter.

 

Other Awards

 

The Company granted restricted stock units for officers’ deferred bonus matches under the Company’s non-qualified deferred compensation plan during the first quarter of fiscal 2013, which vest over a three-year period. The fair value of the award was $46,000 and the compensation expense recorded for these awards during the thirteen weeks ended May 4, 2013 was immaterial.

 

The following table summarizes the nonvested units’ activity under the Company’s plan for the thirteen weeks ended May 4, 2013, assuming maximum vesting of underlying shares for the performance and market based awards described above:

 

 

 

Number of Units

 

Beginning balance

 

796,600

 

Granted

 

272,342

 

Forfeited

 

(211,667

)

Vested

 

(9,547

)

Ending balance

 

847,728

 

v2.4.0.6
FAIR VALUE MEASUREMENTS AND DERIVATIVES
3 Months Ended
May 04, 2013
FAIR VALUE MEASUREMENTS AND DERIVATIVES  
FAIR VALUE MEASUREMENTS AND DERIVATIVES

NOTE 11FAIR 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-financial assets and liabilities that are recognized or disclosed at fair value on a non-recurring basis.

 

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.

 

Assets and Liabilities that are Measured at Fair Value on a Recurring Basis:

 

The Company’s long-term investments and interest rate swap agreements are measured at fair value on a recurring basis. The information in the following paragraphs and tables primarily addresses matters relative to these assets and liabilities.

 

Cash equivalents:

 

Cash equivalents, other than credit card receivables, include highly liquid investments with an original maturity of three months or less at acquisition. The Company carries these investments at fair value. As a result, the Company has determined that its cash equivalents in their entirety are classified as a Level 1 measure within the fair value hierarchy.

 

Collateral investments:

 

Collateral investments include monies on deposit that are restricted. The Company carries these investments at fair value. As a result, the Company has determined that its collateral investments are classified as a Level 1 measure within the fair value hierarchy.

 

Deferred compensation assets:

 

Deferred compensation assets include variable life insurance policies held in a Rabbi Trust. The Company values these policies using observable market data. The inputs used to value the variable life insurance policy fall within Level 2 of the fair value hierarchy.

 

Derivative liability:

 

The Company has two interest rate swaps designated as cash flow hedges on $100.0 million of the Company’s Senior Secured Term Loan facility that expires in October 2018. The Company values these swaps using observable market data to discount projected cash flows and for credit risk adjustments. The inputs used to value derivatives fall within Level 2 of the fair value hierarchy.

 

The following tables provide 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

 

May 4, 2013

 

Level 1

 

Level 2

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

56,116

 

$

56,116

 

$

 

$

 

Collateral investments (1)

 

19,929

 

19,929

 

 

 

Deferred compensation assets (1)

 

3,974

 

 

3,974

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Other liabilities

 

 

 

 

 

 

 

 

 

Derivative liability (2)

 

1,388

 

 

1,388

 

 

 

(dollar amounts in thousands)

 

Fair Value at

 

Fair Value Measurements Using Inputs Considered as

 

Description

 

February 2, 2013

 

Level 1

 

Level 2

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

59,186

 

$

59,186

 

$

 

$

 

Collateral investments (1)

 

20,929

 

20,929

 

 

 

Deferred compensation assets (1)  

 

3,834

 

 

3,834

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Other liabilities

 

 

 

 

 

 

 

 

 

Derivative liability (2)

 

1,567

 

 

1,567

 

 

 

(1) Included in other long-term assets.

(2) Included in other long-term liabilities.

 

The following represents the impact of fair value accounting for the Company’s derivative liability on its consolidated financial statements:

 

(dollar amounts in thousands)

 

Amount of Gain in
Other Comprehensive
Income
(Effective Portion)

 

Earnings Statement
Classification

 

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

 

Thirteen weeks ended May 4, 2013

 

$

113

 

Interest expense

 

$

(146

)

Thirteen weeks ended April 28, 2012

 

$

1,007

 

Interest expense

 

$

(1,654

)

 

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

 

The fair value of the derivative was $1.4 million and $1.6 million payable as of May 4, 2013 and February 2, 2013, respectively. Of the $0.2 million decrease in the fair value during the thirteen weeks ended May 4, 2013, $0.1 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 measures under the fair value hierarchy. Measurements of assets held and used are discussed in Note 12, “Impairments”.

v2.4.0.6
IMPAIRMENTS
3 Months Ended
May 04, 2013
IMPAIRMENTS  
IMPAIRMENTS

NOTE 12—IMPAIRMENTS

 

During the first quarter of fiscal 2013, the Company recorded a $1.2 million impairment charge related to 7 stores classified as held and used. Of the $1.2 million impairment charge, $0.2 million was charged to costs of merchandise sales, and $1.0 million was charged to costs of service revenue. 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 $0.4 million and is classified as a Level 2 or 3 measure within the fair value hierarchy.

v2.4.0.6
LEGAL MATTERS
3 Months Ended
May 04, 2013
LEGAL MATTERS  
LEGAL MATTERS

NOTE 13LEGAL 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
WARRANTY RESERVE (Tables)
3 Months Ended
May 04, 2013
WARRANTY RESERVE  
Schedule of reserve for warranty cost activity

 

 

(dollar amounts in thousands)

 

May 4, 2013

 

February 2, 2013

 

Beginning balance

 

$

864

 

$

673

 

 

 

 

 

 

 

Additions related to current period sales

 

3,402

 

11,920

 

 

 

 

 

 

 

Warranty costs incurred in current period

 

(3,361

)

(11,729

)

 

 

 

 

 

 

Ending balance

 

$

905

 

$

864

 

v2.4.0.6
DEBT AND FINANCING ARRANGEMENTS (Tables)
3 Months Ended
May 04, 2013
DEBT AND FINANCING ARRANGEMENTS  
Schedule of debt and financing arrangements

 

 

(dollar amounts in thousands)

 

May 4, 2013

 

February 2, 2013

 

Senior Secured Term Loan, due October 2018

 

$

199,500

 

$

200,000

 

Revolving Credit Agreement, through July 2016

 

 

 

Long-term debt

 

199,500

 

200,000

 

Current maturities

 

(2,000

)

(2,000

)

Long-term debt less current maturities

 

$

197,500

 

$

198,000

 

v2.4.0.6
EARNINGS PER SHARE (Tables)
3 Months Ended
May 04, 2013
EARNINGS PER SHARE  
Schedule of calculation of basic and diluted earnings per share

 

 

 

 

Thirteen Weeks Ended

 

(dollar amounts in thousands, except per share amounts)

 

May 4, 2013

 

April 28, 2012

 

(a)

Earnings from continuing operations

 

$

3,928

 

$

1,134

 

 

 

 

 

 

 

 

 

Loss from discontinued operations, net of tax

 

(65

)

(72

)

 

 

 

 

 

 

 

 

Net earnings

 

$

3,863

 

$

1,062

 

 

 

 

 

 

 

 

(b)

Basic average number of common shares outstanding during period

 

53,388

 

53,071

 

 

 

 

 

 

 

 

 

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

 

603

 

878

 

 

 

 

 

 

 

 

(c)

Diluted average number of common shares assumed outstanding during period

 

53,991

 

53,949

 

 

 

 

 

 

 

 

 

Basic earnings per share:

 

 

 

 

 

 

Earnings from continuing operations (a/b)

 

$

0.07

 

$

0.02

 

 

Discontinued operations, net of tax

 

 

 

 

Basic earnings per share

 

$

0.07

 

$

0.02

 

 

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

 

Earnings from continuing operations (a/c)

 

$

0.07

 

$

0.02

 

 

Discontinued operations, net of tax

 

 

 

 

Diluted earnings per share

 

$

0.07

 

$

0.02

 

v2.4.0.6
ACCUMULATED OTHER COMPREHENSIVE LOSS (Tables)
3 Months Ended
May 04, 2013
ACCUMULATED OTHER COMPREHENSIVE LOSS  
Schedule of changes in accumulated other comprehensive loss

 

 

(dollar amounts in thousands)

 

Gains and
Losses on Cash Flow
Hedges

 

Beginning balance

 

$

980

 

 

 

 

 

Other comprehensive income before reclassifications, net of $12 tax

 

(22

)

Amounts reclassified from accumulated other comprehensive loss, net of $55 tax (a)

 

(91

)

Net current-period other comprehensive income

 

(113

)

 

 

 

 

Ending balance

 

$

867

 

 

(a)              Reclassified amount increased interest expense.

v2.4.0.6
BENEFIT PLANS (Tables)
3 Months Ended
May 04, 2013
BENEFIT PLANS  
Schedule of pension expense

 

 

 

 

Thirteen weeks ended

 

(dollar amounts in thousands)

 

April 28, 2012

 

Interest cost

 

$

619

 

Expected return on plan assets

 

(704

)

Amortization of net loss

 

566

 

Net periodic benefit cost

 

$

481

 

v2.4.0.6
EQUITY COMPENSATION PLANS (Tables)
3 Months Ended
May 04, 2013
EQUITY COMPENSATION PLANS  
Summary of options activity under the Company's plans

The following table summarizes options activity under the Company’s plans for the thirteen weeks ended May 4, 2013:

 

 

 

Number of Shares

 

Outstanding — beginning balance

 

1,678,593

 

Granted

 

308,963

 

Exercised

 

(3,418

)

Forfeited

 

(3,331

)

Expired

 

(9,855

)

Outstanding — ending balance

 

1,970,952

Schedule of weighted-average assumptions

 

 

 

 

May 4,
2013

 

Dividend yield

 

0.0

%

Expected volatility

 

52.5

%

Risk-free interest rate range:

 

 

 

High

 

0.73

%

Low

 

0.67

%

Ranges of expected lives in years

 

4 - 5

 

Summary of nonvested units' activity under the Company's plan assuming maximum vesting of underlying shares

 

 

 

 

Number of Units

 

Beginning balance

 

796,600

 

Granted

 

272,342

 

Forfeited

 

(211,667

)

Vested

 

(9,547

)

Ending balance

 

847,728

 

v2.4.0.6
FAIR VALUE MEASUREMENTS AND DERIVATIVES (Tables)
3 Months Ended
May 04, 2013
FAIR VALUE MEASUREMENTS AND DERIVATIVES  
Schedule of assets and liabilities measured at fair value on recurring basis

 

 

(dollar amounts in thousands)

 

Fair Value at

 

Fair Value Measurements Using Inputs Considered as

 

Description

 

May 4, 2013

 

Level 1

 

Level 2

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

56,116

 

$

56,116

 

$

 

$

 

Collateral investments (1)

 

19,929

 

19,929

 

 

 

Deferred compensation assets (1)

 

3,974

 

 

3,974

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Other liabilities

 

 

 

 

 

 

 

 

 

Derivative liability (2)

 

1,388

 

 

1,388

 

 

 

(dollar amounts in thousands)

 

Fair Value at

 

Fair Value Measurements Using Inputs Considered as

 

Description

 

February 2, 2013

 

Level 1

 

Level 2

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

59,186

 

$

59,186

 

$

 

$

 

Collateral investments (1)

 

20,929

 

20,929

 

 

 

Deferred compensation assets (1)  

 

3,834

 

 

3,834

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Other liabilities

 

 

 

 

 

 

 

 

 

Derivative liability (2)

 

1,567

 

 

1,567

 

 

 

(1) Included in other long-term assets.

(2) Included in other long-term liabilities.

Schedule of impact of fair value accounting for the Company's derivative liability on its consolidated financial statements

 

 

(dollar amounts in thousands)

 

Amount of Gain in
Other Comprehensive
Income
(Effective Portion)

 

Earnings Statement
Classification

 

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

 

Thirteen weeks ended May 4, 2013

 

$

113

 

Interest expense

 

$

(146

)

Thirteen weeks ended April 28, 2012

 

$

1,007

 

Interest expense

 

$

(1,654

)

 

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

v2.4.0.6
BASIS OF PRESENTATION (Details)
12 Months Ended
Feb. 02, 2014
item
Feb. 02, 2013
item
May 04, 2013
item
BASIS OF PRESENTATION      
Number of Weeks in Fiscal Year 52 53  
Number of operated stores     763
Number of operated stores owned     232
Number of operated stores leased     531
v2.4.0.6
MERCHANDISE INVENTORIES (Details) (USD $)
In Millions, unless otherwise specified
May 04, 2013
Feb. 02, 2013
MERCHANDISE INVENTORIES    
Value of inventory under FIFO method $ 570.2 $ 565.8
Inventory adjustments $ 4.9 $ 4.6
v2.4.0.6
WARRANTY RESERVE (Details) (USD $)
In Thousands, unless otherwise specified
3 Months Ended 12 Months Ended
May 04, 2013
Feb. 02, 2013
Warranty reserve    
Beginning balance $ 864 $ 673
Additions related to current period sales 3,402 11,920
Warranty costs incurred in the current period (3,361) (11,729)
Ending balance $ 905 $ 864
v2.4.0.6
DEBT AND FINANCING ARRANGEMENTS (Details) (USD $)
May 04, 2013
Feb. 02, 2013
Debt and financing arrangements    
Long-term debt $ 199,500,000 $ 200,000,000
Current maturities (2,000,000) (2,000,000)
Long-term debt less current maturities 197,500,000 198,000,000
Long-term debt estimated fair value 202,200,000 203,500,000
Vendor financing program    
Trade payable program liability 149,387,000 149,718,000
Senior Secured Term Loan, due October 2018
   
Debt and financing arrangements    
Long-term debt 199,500,000 200,000,000
Revolving Credit Agreement, through July 2016
   
Debt and financing arrangements    
Maximum borrowing facility 300,000,000  
Outstanding borrowings 0  
Amount of availability utilized to support outstanding letters of credit 34,700,000  
Available borrowing capacity remaining 144,800,000  
Revolving Credit Agreement, through July 2016 | Minimum
   
Debt and financing arrangements    
Minimum borrowing availability required to prevent the triggering of an EBITDA requirement covenant 50,000,000  
Vendor financing program
   
Vendor financing program    
Trade payable program availability 175,000,000  
Trade payable program liability $ 149,400,000 $ 149,700,000