OVERVIEW

Introduction

Pep Boys is a leader in the automotive aftermarket, with 562 locations, housing 5,845 service bays, located throughout 35 states and Puerto Rico. All of our stores feature the nationally recognized Pep Boys brand name, established through more than 85 years of providing high-quality automotive merchandise and services, and are company-owned, ensuring chain-wide consistency for our customers. We are the only national chain offering automotive service, accessories, tires and parts under one roof, positioning us to achieve our goal of becoming the automotive solutions provider of choice for the value-oriented customer. In most of our stores we also have a commercial sales program that provides commercial credit and prompt delivery of tires, parts and other products to local, regional and national repair garages and dealers.

Of our 562 stores, 552 are what we refer to as SUPERCENTERS, which feature an average of 11 state-of-the-art service bays, with an average of more than 20,000 square feet per SUPERCENTER. Our store size allows us to display and sell a more complete offering of merchandise in a wider array of categories than our competitors, with a comprehensive tire offering. We leverage this investment in inventory through our ability to install what we sell in our service bays and by offering this merchandise to both commercial and retail customers.

Our fiscal year ends on the Saturday nearest January 31, which results in an extra week every six years. Our fiscal year ended January 31, 2009 was a 52-week year with the fourth quarter including 13 weeks. Fiscal year 2006 included 53 weeks including 14 weeks in the fourth quarter. All other years included in this report are 52 weeks.

During fiscal 2008, we continued to focus on the key drivers of our long-term strategic plan-improving operational execution, expanding our hard parts assortment and developing a service center growth strategy. We continued to reinforce the importance of improving the customer shopping experience by focusing on continuous training on product knowledge, leadership and customer satisfaction. We made progress on our category management initiatives by completing our store remodel program, updating category line reviews and expanding our parts assortment. We also conducted extensive marketing tests to develop a tailored marketing plan for each of our markets in 2009 to maximize our reach and efficiencies. We also announced plans to add 20 to 40 service only "spokes" in fiscal year 2009 to complement our existing SUPERCENTER store base.

Our net loss per share for the fiscal year ended January 31, 2009 was $0.58 per share or a $0.21 per share improvement over the $0.79 loss per share recorded in fiscal year 2007 (See "Results of Operations").

In addition we continued our real estate monetization program by completing additional sale leaseback transactions on 63 properties in the first half of fiscal year 2008 for net proceeds of $211,470,000. The proceeds from these transactions were used to further reduce overall indebtedness, to satisfy our obligation under the master operating lease and for other capital expenditures.

CAPITAL & LIQUIDITY

Capital Resources and Needs

Our cash requirements arise principally from the purchase of inventory, capital expenditures related to existing and new stores, offices and distribution centers, debt service and contractual obligations.

Cash flows realized through the sale of automotive parts, accessories and services is our primary source of liquidity. Net cash used in operating activities was $39,507,000 in fiscal year 2008 while net cash provided by operating activities was $52,784,000 in fiscal year 2007 and $92,430,000 in fiscal year 2006. The $92,291,000 decrease in cash flows from operating activities in fiscal year 2008 as compared to fiscal year 2007 resulted from a $31,143,000 increase in our net loss (net of non-cash adjustments), and $58,244,000 in unfavorable changes in our operating assets and liabilities. The change in operating assets and liabilities was primarily due to an unfavorable change in merchandise inventory of $16,865,000. The inventory change is a result of our decision to exit certain non-core inventory in the fiscal year 2007 compounded by a decision to expand our hard parts assortment in fiscal year 2008. The change in accounts payable of $13,017,000 was primarily attributable to the timing of our accounts payable cycle. In addition, we expended approximately $5,000,000 to convert our vacation plan to a paid time off plan, satisfied approximately $19,918,000 of liabilities associated with our defined benefits executive supplemental retirement plan ($14,441,000 of the payment was to terminate the SERP) and paid $4,539,000 in connection with reducing the notional value on an interest rate swap by $55,000,000.

In fiscal years 2008 and 2007, we generated $78,726,000 and $149,262,000, respectively, of cash flows from investing activities, while in fiscal year 2006 we used $57,339,000 of cash in investing activities. Fiscal years 2008 and 2007 included positive cash flow due to the sale lease back transactions of 63 and 34 stores, respectively, for $211,470,000 and $162,918,000 in net proceeds. The proceeds in fiscal year 2008 were used to satisfy a $117,121,000 purchase obligation under a master operating lease, to fund other capital expenditures and to retire $26,528,000 of senior subordinated notes. The proceeds in fiscal year 2007 were used to prepay a portion of the Company's Senior Secured Term Loan. In fiscal years 2008 and 2007, we also cancelled certain company-owned life insurance policies for net proceeds of $15,588,000 and $30,045,000, respectively. The proceeds from these non-core assets were used to satisfy our obligations under the Company's defined benefit executive supplemental retirement plan in the current year and to repay borrowings under our revolving credit facility and for general corporate purposes in the prior year.

Our primary capital requirements are for new stores and for maintenance capital expenditures related to, and the remodeling of, our existing stores, offices and distribution centers. Capital expenditures in fiscal years 2008, 2007 and 2006 were $34,762,000 (excluding the purchase of assets under the master lease), $43,116,000 and $49,391,000, respectively. Capital expenditures in fiscal year 2008 were lower than fiscal year 2007 as a result of fewer store remodels. At the end of fiscal year 2008, we had no material capital expenditure commitments. Our fiscal year 2009 capital expenditures are expected to be approximately $50,000,000 which includes the addition of 20 to 40 service only "spoke" shops and the general maintenance of our existing stores. These expenditures are expected to be funded from net cash generated from operating activities and the Company's existing line of credit.

In fiscal years 2008, 2007 and 2006 we used cash of $38,813,000; $203,004,000 and $61,488,000, respectively, in financing activities to reduce our overall indebtedness. In fiscal year 2008, we expended $6,754,000 for financing costs associated with our new $300,000,000 credit facility. In fiscal 2007, we repurchased $50,841,000 of our common shares and paid an additional $7,311,000 to settle shares of our common stock repurchased in the fourth quarter of fiscal year 2006.

We anticipate that cash provided by operating activities, our existing line of credit and cash on hand will exceed our expected cash requirements in fiscal 2009. We expect to have excess availability under our existing line of credit during the entirety of fiscal 2009. We also have substantial owned real estate which we believe we can monetize, if necessary, through additional sale leaseback or other financing transactions.

Our working capital was $179,233,000 at January 31, 2009; $195,343,000 at February 2, 2008 and $163,960,000 at February 3, 2007. Our long-term debt, as a percentage of its total capitalization, was 45% at January 31, 2009; 46% at February 2, 2008 and 49% at February 3, 2007. As of January 31,

2009, we had a $300,000,000 line of credit, with an availability of approximately $182,115,000. Our current portion of long term debt was $1,453,000 at January 31, 2009.

     Contractual Obligations

    The following chart represents our total contractual obligations and
commercial commitments as of January 31, 2009:

                                         Due in less       Due in          Due in       Due after
Contractual Obligations      Total       than 1 year     1 - 3 years     3 - 5 years     5 years
                                                   (dollars in thousands)
Long-term debt(1)         $   349,191    $      1,078    $      2,156    $    147,560    $ 198,397
Operating leases              777,957          77,103         146,357         135,940      418,557
Expected scheduled
interest payments on
all long-term debt,
capital leases and
lease finance
obligations                   134,318          25,256          50,235          47,919       10,908
Capital and lease
financing
obligations(1)                  4,644             375             527             575        3,167
Other long-term
obligations(2)                 22,156           1,711               -               -            -

Total contractual
obligations               $ 1,288,266    $    105,523    $    199,275    $    331,994    $ 631,029

º (2)
º Primarily includes pension obligation of $9,304, FIN 48 liabilities and asset retirement obligations. We made voluntary contributions of $19,918; $440 and $504, to our pension plans in fiscal 2008, 2007 and 2006, respectively. Future plan contributions are dependent upon actual plan asset returns and interest rates. See Note 10 of Notes to Consolidated Financial Statements in "Item 8 Financial Statements and Supplementary Data" for further discussion of our pension plans. The above table does not reflect the timing of projected settlements for our recorded asset disposal costs of $7,130 and our FIN 48 liabilities of $3,429 because we cannot make a reliable estimate of the timing of the related cash payments.

                                            Due in less       Due in          Due in        Due after
Commercial Commitments           Total      than 1 year     1 - 3 years     3 - 5 years      5 years
                                                    (dollar amounts in thousands)
Import letters of credit       $     354    $        354    $          -     $         -       $     -
Standby letters of credit         86,502          46,502          40,000               -             -
Surety bonds                       9,235           9,195              40               -             -
Purchase obligations(1)(2)        14,633          13,920             594             119             -

Total commercial commitments   $ 110,724    $     69,971    $     40,634     $       119       $     -

º (2)
º In the first quarter of fiscal 2005, we entered into a commercial commitment to purchase approximately $4,800 of products over a six-year period. The commitment for years two through five is approximately $950 per year, while the final year's commitment is approximately half that amount. Following year two, we are obligated to pay the vendor a per unit fee if there is a shortfall between our cumulative purchases during the two year period and the minimum purchase requirement. For years three through six, we are obligated to pay the vendor a per unit fee for any

annual shortfall. The maximum annual obligation under any shortfall is approximately $950. At January 31, 2009, we expect to meet the cumulative minimum purchase requirements under this contract.

On January 27, 2006 we entered into a $200,000,000 Senior Secured Term Loan facility due January 27, 2011. This facility is secured by a collateral pool consisting of real property and improvements associated with our stores, which is adjusted periodically based upon real estate values and borrowing levels. Interest at the rate of London Interbank Offered Rate (LIBOR) plus 3.0% on this facility was payable starting in February 2006. Proceeds from this facility were used to satisfy and discharge our then outstanding $43,000,000 6.88% Medium Term Notes due March 6, 2006 and $100,000,000 6.92% Term Enhanced Remarketable Securities (TERMS) due July 7, 2016 and to reduce borrowings under our line of credit by approximately $39,000,000.

On October 27, 2006, we amended and restated the Senior Secured Term Loan facility to (i) increase the size from $200,000,000 to $320,000,000, (ii) extend the maturity from January 27, 2011 to October 27, 2013 and (iii) reduce the interest rate from LIBOR plus 3.00% to LIBOR plus 2.75%. Proceeds were used to satisfy and discharge $119,000,000 in outstanding 4.25% convertible Senior Notes due June 1, 2007.

On February 15, 2007, we further amended the Senior Secured Term Loan facility to reduce the interest rate from LIBOR plus 2.75% to LIBOR plus 2.00%.

On November 27, 2007, we sold the land and buildings for 34 owned properties to an independent third party. We used $162,558,000 of the net proceeds to prepay a portion of the Senior Secured Term Loan facility. This prepayment reduced the principal amount of the facility to $155,000,000 and reduced the scheduled quarterly repayments from $800,000 to $391,000. In addition the prepayment resulted in the recognition in interest expense of approximately $5,900,000 of deferred financing fees and the reclassification from other comprehensive loss for the portion of the related interest rate swap that is no longer designated as a hedge.

As of January 31, 2009, the number of stores which collateralize the Senior Secured Term Loan was reduced to 101 properties. The outstanding balance under the Term loan at the end of fiscal year 2008 was $150,794,000. The $3,858,000 decline in the outstanding balance was due to quarterly principal payments and an additional payment to release a store from the collateral pool to allow it to be sold to an unrelated third party.

On December 14, 2004, we issued $200,000,000 aggregate principal amount of 7.5% Senior Subordinated Notes due December 15, 2014. During fiscal year 2008 the Company repurchased notes in the principal amount of $25,465,000 with a portion of the net proceeds generated from the sale leaseback transactions on 63 stores. On January 31, 2009 the outstanding balance of these notes was $174,535,000.

On December 2, 2004, we further amended our then existing amended and restated line of credit agreement. The amendment increased the amount available for borrowings to $357,500,000 with an ability, upon satisfaction of certain conditions, to increase such amount to $400,000,000. The amendment also reduced the interest rate under the agreement to LIBOR plus 1.75% (after June 1, 2005, the rate decreased to LIBOR plus 1.50%, subject to 0.25% incremental increases as excess

availability falls below $50,000,000). The amendment also provided the flexibility, upon satisfaction of certain conditions, to release up to $99,000,000 of reserves required as of December 2, 2004 under the line of credit agreement to support certain operating leases. Finally, the amendment extended the term of the agreement through December 2009. The weighted average interest rate on borrowings under the line of credit agreement was 7.51% at February 2, 2008. On January 16, 2009, the Company terminated this revolving credit agreement and recognized in interest expense $1,172,000 due to the accelerated write off of related unamortized deferred financing costs.

On January 16, 2009, we entered into a new revolving credit agreement with available borrowings up to $300,000,000. Our ability to borrow under the revolving credit agreement is based on a specific borrowing base consisting of inventory and accounts receivable. Total incurred fees of $6,754,000 were capitalized and will be amortized over the 5 year life of the facility. The interest rate on this credit line is LIBOR or Prime plus 2.75% to 3.25% based upon the then current availability under the facility. The weighted average interest rate on borrowing under the facility was 6.25% at January 31, 2009. Fees based on the unused portion of the facility range from 37.5 to 75.0 basis points. As of January 31, 2009, current borrowings under the facility were $23,862,000.

The weighted average interest rate on borrowings during the fiscal years 2008 and 2007 were 5.8% and 7.51%, respectively.

During fiscal year 2008, notes payable with aggregate principal balances of $248,000 and a weighted average interest rates of 8.0% at February 2, 2008 were paid in full.

Several of our debt agreements require compliance with covenants. The most restrictive of these requirements is contained in our revolving credit agreement. During any period the availability under the revolving credit agreement drops below $52,500,000, we are required to maintain a consolidated fixed charge coverage ratio, of at least 1.1:1.0, calculated as the ratio of
(a) EBITDA (net income plus interest charges, provision for taxes, depreciation and amortization expense, non-cash stock compensation expenses and other non-recurring, non-cash items) minus capital expenditures and income taxes paid to (b) the sum of debt service charges and restricted payments made. The failure to satisfy this covenant would constitute an event of default under the revolving credit agreement, which would result in a cross-default under our 7.5% Senior Subordinated Notes and Senior Secured Term Loan.

As of January 31, 2009, the Company had additional availability under the revolving credit agreement of approximately $182,115,000 and was in compliance with its financial covenants.

In the third quarter of fiscal 2004, we entered into a vendor financing program with an availability of $20,000,000. Under this program, our factor made accelerated and discounted payments to our vendors and we, in turn, made our regularly-scheduled full vendor payments to the factor. This program was terminated effective December, 2007.

On June 29, 2007, we replaced the vendor financing program with a new lender and increased availability up to $65,000,000. This availability was subsequently reduced to $40,000,000. There was an outstanding balance of $31,930,000 and $14,254,000 under this program as of January 31, 2009 and February 2, 2008, respectively.

We have letter of credit arrangements in connection with our risk management, import merchandising and vendor financing programs. We were contingently liable for $354,000 and $691,000 in outstanding import letters of credit and $86,502,000 and $63,477,000 in outstanding standby letters of credit as of January 31, 2009 and February 2, 2008, respectively.

We are also contingently liable for surety bonds in the amount of approximately $9,235,000 and $6,598,000 as of January 31, 2009 and February 2, 2008, respectively. The surety bonds guarantee certain of our payments (for example utilities, easement repairs, licensing requirements and customs fees).

In the third quarter of fiscal year 2004, we entered into a $35,000,000 operating lease for certain operating equipment at an interest rate of LIBOR plus 2.25%. We have evaluated this transaction in accordance with the guidance of Financial Accounting Standards Board Interpretation Number (FIN) 46 and re-evaluated the transaction under FIN 46R and have determined that the Company is not required to consolidate the leasing entity. As of January 31, 2009, there was an outstanding commitment of $1,809,000 under the lease. The lease includes a residual value guarantee with a maximum value of approximately $172,000. We expect the fair market value of the leased equipment to substantially reduce or eliminate our payment under the residual guarantee at the end of the lease term. In accordance with FIN 45, we have recorded a liability for the fair value of the guarantee related to this operating lease. As of January 31, 2009 and February 2, 2008, the current value of this liability was $6,800 and $38,000, respectively, which is recorded in other long-term liabilities on the consolidated balance sheets.

We lease certain property and equipment under operating leases and lease financings which contain renewal and escalation clauses, step rent provisions, capital improvements funding and other lease concessions. These provisions are considered in the calculation of our minimum lease payments which are recognized as expense on a straight-line basis over the applicable lease term. In accordance with the Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No.13, as amended by SFAS No.29, any lease payments that are based upon an existing index or rate are included in our minimum lease payment calculations. Total operating lease commitments as of January 31, 2009 were $777,957,000.

We have a defined benefit pension plan covering our full-time employees hired on or before February 1, 1992.

The Company also has a Supplemental Executive Retirement Plan (SERP). This unfunded plan has a defined benefit component that provides key employees designated by the Board of Directors with retirement and death benefits. Retirement benefits are based on salary and bonuses; death benefits are based on salary. Benefits paid to a participant under the defined pension plan are deducted from the benefits otherwise payable under the defined benefit portion of the SERP. On January 31, 2004, we amended and restated our SERP. This amendment converted the defined benefit portion of the SERP to a defined contribution portion for certain unvested participants and all future participants. On December 31, 2008 the Company terminated the defined benefit portion of the SERP with a $14,441,000 payment and recorded a $6,005,000 charge in accordance with SFAS No.88 "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits."

The expense under these plans for fiscal years 2008, 2007, and 2006 was $8,476,000; $3,612,000 and $3,999,000, respectively. The fiscal year 2008 pension expense includes a SERP settlement charge of $6,005,000. Pension expense is calculated based upon a number of actuarial assumptions, including an

expected return on plan assets of 6.7% and a discount rate of 6.5%. In developing the expected return on asset assumptions, we evaluated input from our actuaries, including their review of asset class return expectations. The discount rate utilized for the pension plans is based on a model bond portfolio with durations that match the expected payment patterns of the plans. We continue to evaluate our actuarial assumptions and make adjustments as necessary for the existing plans. In fiscal year 2008, we contributed an aggregate of $19,918,000 to our pension plans to fund the retirement obligations and for the termination of the defined benefit portion of the SERP. Based upon the current funded status of the defined benefit pension plan, we do not expect to make any cash contributions in fiscal year 2009. See Note 10 of Notes to Consolidated Financial Statements in "Item 8. Financial Statements and Supplementary Data" for further discussion of our pension plans.

RESULTS OF OPERATIONS

The following discussion explains the material changes in our results of operations for the fifty-two weeks ended January 31, 2009, the fifty-two weeks ended February 2, 2008 and fifty-three weeks ended February 3, 2007.

Discontinued Operations

In the third quarter of fiscal year 2007, we adopted our long-term strategic plan. One of the initial steps in this plan was the identification of 31 low-return stores for closure. We have accounted for these store closures in accordance with the provisions of SFAS No.146 "Accounting for Costs Associated with Exit or Disposal Activities" and SFAS No.144, "Accounting for Impairment or Disposal of Long-Lived Assets" (SFAS No.144). In accordance with SFAS No.144, our discontinued operations for all periods presented reflect the operating results for 11 of the 31 closed stores because we do not believe that the customers of these stores are likely to become customers of other Pep Boys stores due to geographical considerations. The operating results for the other 20 closed stores are included in continuing operations because we believe that the customers of these stores are likely to become customers of other Pep Boys stores that are in close proximity.

The following analysis of our results of continuing operations excludes the operating results of the above-referenced 11 stores which have been classified as discontinued operations for all periods presented.

Analysis of Statement of Operations

    The following table presents, for the periods indicated, certain items in
the consolidated statements of operations as a percentage of total revenues
(except as otherwise provided) and the percentage change in dollar amounts of
such items compared to the indicated prior period.

                                  Percentage of Total Revenues                   Percentage Change
                                                Feb 2,         Feb 3,          Fiscal
                                                 2008           2007          2008 vs.     Fiscal 2007
                           Jan 31, 2009         (Fiscal        (Fiscal         Fiscal          vs.
Year ended                 (Fiscal 2008)         2007)          2006)           2007       Fiscal 2006
. . .