OVERVIEW

The following discussion and analysis explains the results of operations for the first fiscal quarter of 2012 and 2011 and significant developments affecting our financial condition for the three months ended April 28, 2012. This discussion and analysis should be read in conjunction with the consolidated interim financial statements and the notes to such consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q, and the consolidated financial statements and the notes to such financial statements included in Item 8, "Financial Statements and Supplementary Data" of our Annual Report on Form 10-K for the fiscal year ended January 28, 2012.

INTRODUCTION

The Pep Boys-Manny, Moe & Jack is the leading national chain offering automotive service, tires, parts and accessories. This positioning allows us to streamline the distribution channel and pass the savings on to our customers facilitating our vision to be the automotive solutions provider of choice for the value-oriented customer. The majority of our stores are in a Supercenter format, which serves both "do-it-for-me" ("DIFM", which includes service labor, installed merchandise and tires) and "do-it-yourself" ("DIY") customers with the highest quality service offerings and merchandise. Most of our Supercenters also have a commercial sales program that provides delivery of tires, parts and other products to automotive repair shops and dealers. In 2009, as part of our long-term strategy to lead with automotive service, we began complementing our existing Supercenters store base with Service & Tire Centers. These Service & Tire Centers are designed to capture market share and leverage our existing Supercenters and support infrastructure. This growth will occur both organically and through acquisitions. The growth is targeted at existing markets, but may include new markets opportunistically. Acquisitions will be used to accelerate growth in markets where the Company is under-penetrated.

In the first quarter of fiscal 2012, we opened four Service & Tire Centers and closed four others whose leases expired and were not renewed. We are targeting a total of 30 new Service & Tire Centers and 10 Supercenters in fiscal 2012. As of April 28, 2012, we operated 562 Supercenters and 169 Service & Tire Centers, as well as seven legacy Pep Boys Express (retail only) stores throughout 35 states and Puerto Rico.

EXECUTIVE SUMMARY

Net earnings for the first quarter of 2012 were $1.1 million, an $11.3 million decline from the $12.4 million reported for the first quarter of 2011. The decrease in profitability was primarily due to lower comparable store revenues combined with lower total gross profit margins, and higher selling, general and administrative expenses. Our diluted earnings per share were $0.02 for the first quarter of 2012, compared to the $0.23 for same period in the prior year.

Total revenue increased for the first quarter of 2012 by 2.2%, or $11.1 million, as compared to the same period of the prior year as a result of our growth strategy. This increase in total revenues was comprised of a 7.0% increase in service revenue and a 0.9% increase in merchandise sales. In the prior year second quarter we acquired Tire Stores Group Holding Corporation which operated an 85-store chain in Florida, Georgia and Alabama under the name Big 10. The Big 10 stores contributed $22.1 million of revenue in the current year first quarter. For the first quarter of 2012, comparable store sales (sales generated by locations in operation during the same period of the prior year) decreased by 2.8% or $14.0 million. This decrease in comparable store sales was comprised of a 1.2% decrease in comparable store service revenue and a 3.2% decrease in comparable store merchandise sales.

Sales of our services and non-discretionary products are favorably impacted by an increase in miles driven. From February through April 2012, unleaded gasoline prices averaged $3.78 per gallon (national average) as compared to $3.52 in the corresponding period of the prior year thereby reducing our customers' disposable income while miles driven grew between 1 to 2 percent from December, 2011 through March, 2012 after declining the previous 9 months. The financial burden of higher gasoline prices, continued high unemployment and negative consumer confidence in the overall U.S. economy depressed first quarter sales. We believe these factors have also led customers to maintain their existing vehicles, rather than purchasing new ones which, in turn, has partially offset the negative impact the factors described above have had on our sales of services and non-discretionary products. In addition, our first quarter 2012 sales were also impacted by the unusually mild weather which led to decreased demand for tires, automotive repair and maintenance products and services and weather-related merchandise (such as batteries, wiper blades and snow-chains). Given the nature of the above, we cannot predict whether or for how long these trends will continue, nor can we predict to what degree these trends will affect us in the future.

Our primary response to fluctuations in customer demand is to adjust our service and product assortment, store staffing and advertising messages. In the first quarter, we increased our spending on marketing and continued to roll out new technologies which did not result in short term sales increases of a magnitude that we had anticipated. However, we believe that these initiatives including our TreadSmart solution, which gives customers the ability to research, purchase and schedule the installation of tires online at a local Pep Boys location, and the recent roll out nationally of an eCommerce solution that allows retail customers to purchase products online for pick up at their local store will contribute to our long-term success. We also believe that we are well positioned to help our customers save money and meet their needs in a challenging macroeconomic environment.

RESULTS OF OPERATIONS

The following discussion explains the material changes in our results of operations.

Analysis of Statement of Operations

Thirteen weeks ended April 28, 2012 vs. Thirteen weeks ended April 30, 2011

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
                                              April 28, 2012     April 30, 2011         Favorable
Thirteen weeks ended                          (Fiscal 2012)       (Fiscal 2011)       (Unfavorable)

Merchandise sales                                       78.6 %             79.6 %                 0.9 %
Service revenue (1)                                     21.4               20.4                   7.0
Total revenues                                         100.0              100.0                   2.2
Costs of merchandise sales (2)                          70.5 (3)           69.8 (3)              (1.9 )
Costs of service revenue (2)                            94.5 (3)           88.7 (3)             (14.0 )
Total costs of revenues                                 75.7               73.7                  (4.9 )
Gross profit from merchandise sales                     29.5 (3)           30.2 (3)              (1.5 )
Gross profit from service revenue                        5.5 (3)           11.3 (3)             (47.8 )
Total gross profit                                      24.3               26.3                  (5.5 )
Selling, general and administrative
expenses                                                22.8               21.2                  (9.9 )
Net gain (loss) from dispositions of
assets                                                     -                  -                     -
Operating profit                                         1.5                5.1                 (69.8 )
Non-operating income                                     0.1                0.1                 (19.9 )
Interest expense                                         1.2                1.3                  (0.3 )
Earnings from continuing operations before
income taxes                                             0.4                4.0                 (90.7 )
Income tax expense                                      40.1 (4)           39.2 (4)              90.5
Earnings from continuing operations                      0.2                2.4                 (90.9 )
Discontinued operations, net of tax                        -                  -                     -
Net earnings                                             0.2                2.4                 (91.4 )

Total revenue for the first quarter of 2012 increased by 2.2%, or $11.1 million, to $524.6 million from $513.5 million in the first quarter of 2011, while comparable store sales for the first quarter of 2012 decreased 2.8% as compared to the first quarter of 2011.

This decrease in comparable store sales consisted of a decrease of 1.2% in comparable store service revenue and a decrease of 3.2% in comparable store merchandise sales. Total comparable store sales decreased due to lower customer counts partially offset by an increase in the average transaction value. While our total revenue figures were favorably impacted by the opening of new stores, a new store is not added to our comparable store sales until it reaches its 13th month of operation. Non-comparable stores contributed an additional $25.1 million of total revenue in the first quarter of 2012 as compared to the first quarter of 2011.

Total merchandise sales increased 0.9%, or $3.7 million, to $412.3 million in the first quarter of fiscal 2012, compared to $408.6 million during the prior year quarter. The increase in merchandise sales was due to our non-comparable stores which contributed an additional $16.5 million of sales during the quarter, partially offset by a decline in comparable store merchandise sales of 3.2%, or $12.8 million due to lower comparable store customer counts offset by a higher average transaction value. The decrease in comparable store merchandise sales was comprised of a 4.6% decline in our retail business and a 0.4% decline in merchandise sold through our service business. Retail comparable store merchandise sales were negatively impacted by 70 basis points due to the temporary disruption of converting stores to our new Supercenter format, called "One Team". One Team is designed to improve the customer experience, highlight our service department, employ a consolidated, performance-based labor pay model and reduce the store footprint. Over the long term, we expect that these transitional issues will be resolved and sales will return to, if not exceed, pre-conversion levels. Total service revenue increased 7.0%, or $7.4 million, to $112.3 million in the first quarter of 2012 from the $104.9 million recorded in the prior year quarter. The increase in service revenue was due to the contribution from our new stores, which accounted for an additional $8.6 million of service revenue, partially offset by a decline in comparable store service revenue of $1.2 million, or 1.2%. The decrease in comparable store service revenue was due to lower average transaction value. Both our retail and service revenues were impacted by unusually mild weather in the current year first quarter which led to decreased demand for tires, automotive repair and maintenance products and services and weather-related merchandise (such as batteries, wiper blades and snow-chains).

We believe that comparable store customer counts decreased in the quarter due to macroeconomic conditions including increased gasoline prices, while the average transaction value increased due to selling price increases that were implemented to reflect the significant inflation in material costs. We believe that higher gasoline prices negatively affected our customers' disposable income in the first quarter of 2012. This negative headwind was somewhat mitigated by the continued aging of the US light vehicle fleet as consumers spent more money on maintaining their vehicles as opposed to buying new vehicles. We believe that utilizing innovative marketing programs to communicate our value-priced, differentiated service and merchandise assortment will drive increased customer counts and that our continued focus on delivering a better customer experience than our competitors will convert those increased customer counts into sales improvements consistently over all lines of business over the long-term.

Total gross profit decreased by $7.5 million, or 5.5%, to $127.7 million in the first quarter of 2012 from $135.1 million in the first quarter of 2011. Total gross profit margin decreased to 24.3% for the first quarter of 2012 from 26.3% for the first quarter 2011. The decrease in total gross profit margin was primarily due to the growth of our Service & Tire Centers, which lowered total gross profit margin by 170 and 60 basis points in the first quarter of 2012 and 2011, respectively. The sales mix in our new Service & Tire Centers is more highly concentrated in tires which have lower product margins combined with higher rent and payroll costs as a percent of total sales. In addition, the new stores opened by the Company are in their ramp up stage for sales while incurring their full amount of fixed expenses, including payroll and occupancy costs (rent, utilities and building maintenance), which has negatively affected total gross profit margin. Excluding the impact of the Service & Tire Centers from both periods, the total gross profit margin declined by 90 basis points to 26.0% from 26.9 % in the prior year. This decline was mostly due to a shift in sales to lower margin tires and decreased tire margin rates due to cost increases exceeding retail price increases. While the acquired and new organic Service & Tire Centers have had a negative impact on total gross profit margin, these Service & Tire Centers positively contributed to total gross profit for the current fiscal year.

Gross profit from merchandise sales decreased by $1.8 million, or 1.5%, to $121.5 million for the first quarter of 2012 from $123.3 million in the first quarter of 2011. Gross profit margin from merchandise sales decreased to 29.5% for the first quarter of 2012 from 30.2% for the first quarter of 2011. The decrease in gross profit margin was primarily due to a decline in product gross margins partially offset by lower store occupancy costs. Product gross margin decreased 160 basis points primarily due to a shift in sales to lower margin tires and decreased tire margin rates due to cost increases exceeding retail price increases. Occupancy costs decreased as a percent of merchandise sales by 100 basis points due to lower utilities and repairs and maintenance expenses due to the unusually mild weather in the first quarter of 2012 as compared to the prior year.

Gross profit from service revenue decreased by $5.6 million, or 47.8%, to $6.2 million in the first quarter of 2012 from $11.8 million recorded in the first quarter of 2011. Gross profit margin from service revenue decreased to 5.5% for the first quarter of 2012 from 11.3% for the prior year quarter. In accordance with GAAP, service revenue is limited to labor sales (excludes any revenue from installed parts and materials) and costs of service revenue includes the fully loaded service center payroll, and related employee benefits, and service center occupancy costs (rent, utilities and building maintenance). The decrease in service revenue gross profit margin was primarily due to the growth of our Service & Tire Centers, which lowered margins by 660 and 270 basis points in the first

quarter of 2012 and 2011, respectively. Excluding the impact of Service & Tire Centers, gross profit from service revenue decreased to 12.1% for the first quarter of 2012 from 14.0% for the first quarter of 2011. The decrease in gross profit, exclusive of Service & Tire Centers, was mostly due to the deleveraging effect of lower service revenues on store occupancy costs and payroll and related benefits.

Selling, general and administrative expenses as a percentage of total revenues increased to 22.8% for the first quarter of 2012 from 21.2% for the first quarter of 2011. Selling, general and administrative expenses increased $10.8 million, or 9.9%, to $119.7 million in the first quarter of 2012 from $108.9 million in the prior year quarter primarily due to higher payroll and related costs of $5.0 million, higher media expense of $3.5 million, merger related costs of $1.6 million, and higher legal and professional services costs of $0.6 million.

Interest expense remained relatively flat at $6.5 million in the first quarter of 2012 and 2011.

Our income tax expense for the first quarter of 2012 was $0.8 million, or an effective rate of 40.1%, as compared to an expense of $8.0 million, or an effective rate of 39.2%, for the first quarter of 2011. The annual rate depends on a number of factors, including the jurisdiction in which operating profit is earned and the timing and nature of discrete items.

As a result of the foregoing, we reported net earnings of $1.1 million in the first quarter of 2012 as compared to net earnings of $12.4 million in the prior year period. Our basic and diluted earnings per share were $0.02 for the first quarter of 2012 as compared to $0.23 for the first quarter of 2011.

INDUSTRY COMPARISON

We operate in the U.S. automotive aftermarket, which has two general lines of business: (1) the Service business, defined as Do-It-For-Me (service labor, installed merchandise and tires) and (2) the Retail business, defined as Do-It-Yourself (retail merchandise) and commercial. Generally, specialized automotive retailers focus on either the Retail or Service area of the business. We believe that operation in both the Retail and Service areas of the business positively differentiates us from most of our competitors. Although we manage our store performance at a store level in aggregation, we believe that the following presentation, which includes the reclassification of revenue from installed products from retail sales to service center revenue, shows an accurate comparison against competitors within the two sales arenas. We compete in the Retail area of the business through our retail sales floor and commercial sales business. Our Service Center business competes in the Service area of the industry.

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

                                                      Thirteen weeks ended
(dollar amounts in thousands)                   April 28, 2012     April 30, 2011

Service Center Revenue (1)                     $        271,089   $        247,330
Retail Sales (2)                                        253,515            266,210
Total revenues                                 $        524,604   $        513,540

Gross profit from Service Center Revenue (3)   $         53,888   $         58,962
Gross profit from Retail Sales (3)                       73,764             76,160
Total gross profit                             $        127,652   $        135,122

CAPITAL AND LIQUIDITY

Our cash requirements arise principally from (1) the purchase of inventory and capital expenditures related to existing and new stores, offices and distribution centers, (2) debt service and (3) contractual obligations. Cash flows realized through the sales of automotive services, tires, parts and accessories are our primary source of liquidity. Net cash provided by operating activities was $38.0 million in the first quarter of 2012, as compared to $38.6 million in the prior year period. The $0.6 million decrease from the prior year period was due to decreased net earnings, net of non-cash adjustments of $14.9 million mostly offset by a favorable change in operating assets and liabilities of $14.3 million. The change in operating assets and liabilities was primarily due to a favorable change in accrued expenses of $14.6 million and a change in other long-term liabilities of $2.9 million.

In both fiscal year 2012 and 2011, the increased investment in inventory of $13.2 million and $13.3 million, respectively, was funded entirely by the improvement in our trade vendor payment terms. Taking into consideration changes in our trade payable program liability (shown as cash flows from financing activities on the consolidated statements of cash flows), cash generated from accounts payable was $33.3 million and $18.0 million for 2012 and 2011, respectively. The ratio of accounts payable, including our trade payable program, to inventory was 57.7% at April 28, 2012, 53.6% at January 28, 2012 and 49.2% at April 30, 2011, respectively. The $13.2 million increase in inventory from January 28, 2012 was primarily due to expanded coverage in tires and certain hard part categories.

The change in accrued expenses was primarily due to an increase in payroll and related accruals of $7.3 million and an increase in employee payroll tax accruals of $6.3 million due to the timing of payments to taxing authorities. The change in other long-term liabilities was primarily due to a voluntary pension contribution of $3.0 million made in the first quarter of 2011. There were no discretionary contributions made during the first quarter of 2012.

Cash used in investing activities was $11.9 million in the first quarter of 2012 as compared to $23.7 million in the prior year period. Capital expenditures were $11.9 million and $18.1 million in the first quarter of 2012 and 2011, respectively. Capital expenditures for the first quarter of 2012, in addition to our regularly scheduled store, distribution center improvements and information technology enhancements, included the addition of four new Service & Tire Centers. Capital expenditures for the first quarter of 2011 included the addition of two new Service & Tire Centers and the acquisition of seven service and tire centers in the Seattle/Tacoma area. During the first quarter of 2011, we invested $4.8 million in a restricted account as collateral for retained liabilities included within existing insurance programs in lieu of previously outstanding letters of credit.

Our targeted capital expenditures for fiscal 2012 are $65.0 million. Our fiscal year 2012 capital expenditures include the addition of approximately 40 new locations, the conversion of 15 Supercenters into Superhubs and required expenditures for our existing stores, offices and distribution centers. These expenditures are expected to be funded by cash on hand and net cash generated from operating activities. Additional capacity, if needed, exists under our existing line of credit.

In the first quarter of 2012, cash provided by financing activities was $15.1 million, as compared to cash used in financing of $4.8 million in the prior year period. The cash provided by financing activities in the first quarter of 2012 was primarily related to net borrowings on our trade payable program liability. The trade payable program is funded by various bank participants who have the ability, but not the obligation, to purchase, directly from our vendors, account receivables owed by Pep Boys. As of April 28, 2012 and January 28, 2012, we had an outstanding balance of $100.4 million and $85.2 million, respectively (classified as trade payable program liability on the consolidated balance sheet).

We anticipate that cash on hand and cash generated by operating activities will exceed our expected cash requirements in fiscal year 2012. In addition, we expect to have excess availability under our existing revolving credit agreement during the entirety of fiscal year 2012. As of April 28, 2012, we had zero drawn on our revolving credit facility and maintained undrawn availability of $189.4 million.

During fiscal 2011, the Company began the process of terminating its defined benefit pension plan (the "Plan"), which covered full-time employees hired on or before February 1, 1992. The termination of the Plan, which has been frozen since December 31, 1996, 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 amount necessary to do so is not yet known, but is currently estimated to be between $13.0 and $18.0 million. 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.

Our working capital was $177.9 million and $166.6 million at April 28, 2012 and January 28, 2012, respectively. Our long-term debt, as a percentage of our total capitalization, was 36.7% and 36.8% at April 28, 2012 and January 28, 2012, respectively.

Contractual Obligations

For a discussion of our other contractual obligations, see a discussion of future commitments under Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," in our Form 10-K for the fiscal year ended January 28, 2012. There have been no significant developments with respect to our contractual obligations since January 28, 2012.

NEW 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 . . .