OVERVIEW

The following discussion and analysis explains the results of operations for the third fiscal quarter and first nine months of 2012 and 2011 and significant developments affecting our financial condition for the nine months ended October 27, 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 high quality service and merchandise offerings. 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 Supercenter 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 may occur both organically and through acquisitions. The growth is targeted at existing markets, but may include new markets opportunistically. The objective is to grow our market share and to leverage inventory, marketing, distribution and support costs. Acquisitions may be used to accelerate growth in markets where the Company is under-penetrated.

In the first nine months of fiscal 2012, we opened ten Service & Tire Centers and two Supercenters and closed six stores whose leases expired and were not renewed. We are targeting a total of 22 new Service & Tire Centers and 7 Supercenters in fiscal 2012. As of October 27, 2012, we operated 562 Supercenters and 175 Service & Tire Centers, as well as 7 legacy Pep Boys Express (retail only) stores throughout 35 states and Puerto Rico.

EXECUTIVE SUMMARY

Net loss for the third quarter of 2012 was $6.8 million, as compared to net earnings of $7.0 million reported for the third quarter of 2011. The 2012 results included, on a pre-tax basis, debt refinancing expense of $11.2 million and an asset impairment charge of $8.8 million. Our diluted (loss) earnings per share for the third quarter and the first nine months of 2012 were ($0.13) and $0.51, respectively, as compared to earnings of $0.13 and $0.62 recorded for the corresponding periods of 2011.

Total revenue decreased for the third quarter of 2012 by 2.4%, or $12.6 million, as compared to the same period of the prior year due to a decline in comparable store sales (sales generated by locations in operation during the same period) of 2.7% slightly offset by increased contribution from our non-comparable store locations. This comparable store sales decline was comprised of a 0.2% increase in comparable store service revenue offset by a 3.5% decrease in comparable store merchandise sales.

We believe that the industry fundamentals of increasing vehicle complexity and customer preference for DIFM remain solid over the long-term resulting in consistent demand for maintenance and repair services. We are also encouraged that from January through September 2012, miles driven (which favorably impacts sales of our services and non-discretionary products) grew 0.7% after declining throughout 2011. However, we believe the tough macroeconomic environment, including persistent high unemployment and negative consumer confidence in the overall U.S. economy, depressed our third quarter sales. In addition, we believe the spike in gasoline prices during the August through October period challenged our customer's spending relative to discretionary and deferrable purchases in the quarter. Gasoline prices began to decline starting in November but given the nature of these macroeconomic factors, we cannot predict whether or for how long these trends may 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 addition, we continue to make it easy for customers to choose us to do it for them and to expand our online efforts to make Pep Boys the most convenient place to shop for all of their automotive needs. In the third quarter, we reached another e-commerce milestone with the launch of buy on-line, ship to home. This complements our previously implemented on-line capabilities of service appointment scheduling, TreadSmart (tires from information to installation) and buy on-line, pick up in store.

We 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 October 27, 2012 vs. Thirteen weeks ended October 29, 2011

The following table presents for the periods indicated certain items in the consolidated statements of operations and comprehensive income 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
                                                                 October
                                                                 29, 2011
                                           October 27, 2012       (Fiscal          Favorable
Thirteen weeks ended                        (Fiscal 2012)         2011)          (Unfavorable)

Merchandise sales                                      78.7 %         79.4 %                (3.2 )%
Service revenue (1)                                    21.3           20.6                   0.8
Total revenues                                        100.0          100.0                  (2.4 )
Costs of merchandise sales (2)                         71.0 (3)       70.5 (3)               2.7
Costs of service revenue (2)                          100.4 (3)       95.6 (3)              (5.9 )
Total costs of revenues                                77.2           75.7                   0.4
Gross profit from merchandise sales                    29.1 (3)       29.5 (3)              (4.6 )
Gross (loss) profit from service revenue              (0.4) (3)        4.5 (3)            (110.0 )
Total gross profit                                     22.8           24.3                  (8.6 )
Selling, general and administrative
expenses                                               22.0           21.0                  (2.3 )
Net gain (loss) from dispositions of
assets                                                    -              -                     -
Operating profit                                        0.7            3.3                 (78.1 )
Merger termination fees, net                              -              -                    NA
Other income                                            0.1            0.1                   4.4
Interest expense                                        3.4            1.3                (147.6 )
(Loss) earnings from continuing
operations before income taxes                         (2.5 )          2.1                (215.0 )
Income tax (benefit) expense                           47.5 (4)       36.7 (4)             249.0
(Loss) earnings from continuing
operations                                             (1.3 )          1.3                (195.3 )
Discontinued operations, net of tax                       -              -                     -
Net (loss) earnings                                    (1.3 )          1.3                (196.4 )

(2) Costs of merchandise sales include the cost of products sold, purchasing, warehousing and store occupancy costs. Costs of service revenue include service center payroll and related employee benefits and service center occupancy costs. Occupancy costs include utilities, rents, real estate and property taxes, repairs and maintenance and depreciation and amortization expenses.

(3) As a percentage of related sales or revenue, as applicable.

(4) As a percentage of earnings from continuing operations before income taxes.

Total revenue for the third quarter of 2012 decreased by 2.4%, or $12.6 million, to $509.6 million from $522.2 million in the third quarter of 2011, primarily due to the decline in comparable store sales of 2.7%. Our comparable store sales consisted of an increase of 0.2% in comparable store service revenue offset by a decrease of 3.5% in comparable store merchandise sales. Total comparable store sales decreased as a result of lower customer counts partially offset by an increase in the average transaction amount per customer. While our total revenue figures were favorably impacted by the opening or acquisition 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 $1.5 million of total revenue in the third quarter of 2012 as compared to the third quarter of 2011.

Total merchandise sales decreased 3.2%, or $13.4 million, to $401.1 million in the third quarter of fiscal 2012, compared to $414.5 million during the prior year quarter. The decrease in total merchandise sales was due to a decline in comparable store merchandise

sales of 3.5%, or $14.3 million, partially offset by our non-comparable stores which contributed an additional $0.8 million of merchandise sales in the quarter. The decrease in comparable store merchandise sales was driven primarily by lower comparable store customer counts partially offset by a higher average transaction amount per customer. The decrease in comparable store merchandise sales was comprised of a 5.4% decline in our retail business and a 0.3% decrease in merchandise sold through our service business. Total service revenue increased 0.8%, or $0.8 million, to $108.5 million in the third quarter of 2012 from the $107.6 million recorded in the prior year quarter. The increase in service revenue was comprised of a $0.2 million, or 0.2%, increase in comparable store service revenue and our new non-comparable stores contributed an additional $0.7 million of service revenues. The increase in comparable store service revenue was due to higher customer counts offset by a decrease in the average transaction amount per customer.

We believe that total comparable store customer counts decreased due to macroeconomic conditions, while the average transaction amount per customer increased due to selling price increases implemented to reflect the inflation in material costs. However, in our service business, we believe that comparable store service customer counts increased due to the strength in our maintenance and repair business led by increased oil change transactions, which have a lower average transaction amount per customer. This shift in service sales mix towards oil changes reduced the average transaction amount per service customer. We believe that the current economic environment including continued high unemployment weighed heavily on consumer spending relative to discretionary and deferrable purchases and depressed our third quarter sales. Over the long-term, 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.

Total gross profit decreased by $10.9 million, or 8.6%, to $116.0 million for the third quarter of 2012 from $126.9 million for the third quarter of 2011. Total gross profit margin decreased to 22.8% for the third quarter of 2012 from 24.3% for the third quarter of 2011. Total gross profit for the third quarter of 2012 included an asset impairment charge of $8.8 million. Excluding the asset impairment charge total gross profit margin increased by 20 basis points to 24.5% for the third quarter of 2012 from 24.3% in the prior year. The increase in total gross profit margin, excluding the impairment charge, was primarily due to improved product margins primarily in tires and oil (70 basis points) mostly offset by higher payroll and related expenses as a percent of total sales (40 basis points). The new Service & Tire Centers have a higher concentration of their sales in lower margin tires and have higher rent and payroll costs as a percent of total sales. The Service & Tire Centers, exclusive of the impairment charge, reduced total margins by 170 basis points and 150 basis points in the third quarter of 2012 and 2011, respectively. While the new Service & Tire Centers have had a negative impact on total gross profit margin, these Service & Tire Centers positively contributed to total gross profit in both years.

Gross profit from merchandise sales decreased by $5.6 million, or 4.6%, to $116.5 million for the third quarter of 2012 from $122.1 million in the third quarter of 2011. Gross profit margin from merchandise sales decreased to 29.1% for the third quarter of 2012 from 29.5% in the third quarter of 2011. Gross profit from merchandise sales for the third quarter of 2012 included an asset impairment charge of $4.2 million. Excluding the asset impairment charge gross profit margin from merchandise sales increased by 60 basis points to 30.1% for the third quarter of 2012 from 29.5% in the prior year. The increase in gross profit margin from merchandise sales was due to improved product margins primarily in tires and oil (37 basis points) and lower store occupancy costs (utilities and depreciation) as a percent of merchandise sales (42 basis points), partially offset by higher warehousing costs as a percent of merchandise sales (15 basis points).

Gross profit from service revenue decreased by $5.3 million, or 110.0%, to a loss of $0.5 million in the third quarter of 2012 from $4.8 million in the third quarter of 2011. Gross profit margin from service revenue decreased to (0.4%) for the third quarter of 2012 from 4.5% 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 revenues includes the fully loaded service center payroll and related employee benefits and service center occupancy costs. Gross profit from service revenue for the third quarter of 2012 included an asset impairment charge of $4.6 million. Excluding the asset impairment charge gross profit margin from service revenues decreased by 70 basis points to 3.8% for the third quarter of 2012 from 4.5% in the prior year. The decrease in service revenue gross profit margin was due to the growth of our Service & Tire Centers, which lowered margins by 697 and 673 basis points in the third quarter of 2012 and 2011, respectively. Excluding the impact of Service & Tire Centers, gross profit margin from service revenue decreased to 10.8% for the third quarter of 2012 from 11.2% for the third quarter of 2011. The decrease in gross profit margin, exclusive of Service & Tire Centers, was due in part to a deleveraging effect of lower sales volumes on increased store occupancy costs such as utilities and repairs and maintenance.

Selling, general and administrative expenses as a percentage of total revenues increased to 22.0% for the third quarter of 2012 from 21.0% for the third quarter of 2011. Selling, general and administrative expenses increased $2.5 million, or 2.3%, to $112.0 million from $109.5 million in the prior year quarter primarily due to higher media expense of $1.5 million, higher store payroll expense of $1.4 million, higher legal and professional services costs of $0.6 million and higher general liability claims expense of $0.4 million which was partially offset by lower credit card transaction fees of $1.4 million, and the reversal of compensation expense of $0.9

million related to previously issued performance based stock grants. In addition, in the third quarter of 2011, the Company recorded a reduction to the contingent consideration of $0.7 million related to one of the Company's acquisitions.

Interest expense for the third quarter of 2012 was $17.1 million, an increase of $10.2 million over the $6.9 million reported for the third quarter of 2011.The increase was due to debt refinancing costs of $11.2 million (See Note 7 to the Consolidated Financial Statements).

Our income tax benefit for the third quarter of 2012 was $6.1 million, or an effective rate of 47.5%, as compared to an expense of $4.1 million, or an effective rate of 36.7%, for the third quarter of 2011. The effective income tax rate differs from the U.S. statutory rate principally due to deferred tax adjustments related to foreign tax credits generated in our Puerto Rico operations, state taxes, and other certain permanent tax items. The changes in the rate from period to period are primarily driven by a reduction in ordinary income or loss in relation to foreign taxes in our Puerto Rico operations, state taxes, and other certain permanent tax items.

As a result of the foregoing, we reported a net loss of $6.8 million in the third quarter of 2012 as compared to net earnings of $7.0 million in the prior year period. Our diluted loss per share was $0.13 as compared to earnings per share of $0.13 in the prior year period.

Thirty-nine weeks ended October 27, 2012 vs. Thirty-nine weeks ended October 29, 2011

The following table presents for the periods indicated certain items in the consolidated statements of operations and comprehensive income 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
                                        October 27, 2012     October 29, 2011         Favorable
Thirty-nine weeks ended                  (Fiscal 2012)         (Fiscal 2011)        (Unfavorable)

Merchandise sales                                   78.7 %               79.5 %                (0.9 )%
Service revenue (1)                                 21.3                 20.5                   4.1
Total revenues                                     100.0                100.0                   0.1
Costs of merchandise sales (2)                      70.4 (3)             69.9 (3)               0.2
Costs of service revenue (2)                        96.7 (3)             92.4 (3)              (9.0 )
Total costs of revenues                             76.0                 74.5                  (2.1 )
Gross profit from merchandise sales                 29.6 (3)             30.1 (3)              (2.6 )
Gross profit from service revenue                    3.3 (3)              7.6 (3)             (54.8 )
Total gross profit                                  24.0                 25.5                  (5.8 )
Selling, general and administrative
expenses                                            22.2                 21.3                  (4.3 )
Net gain (loss) from dispositions of
assets                                                 -                    -                     -
Operating profit                                     1.8                  4.2                 (57.3 )
Merger termination fees, net                         2.7                    -                    NA
Non-operating income                                 0.1                  0.1                  (7.7 )
Interest expense                                     1.9                  1.3                 (51.3 )
Earnings from continuing operations
before income taxes                                  2.7                  3.1                 (10.6 )
Income tax expense                                  35.4 (4)             29.9 (4)              (5.6 )
Earnings from continuing operations                  1.8                  2.1                 (17.6 )
Discontinued operations, net of tax                    -                    -                     -
Net earnings                                         1.8                  2.1                 (17.9 )

(2) Costs of merchandise sales include the cost of products sold, purchasing, warehousing and store occupancy costs. Costs of service revenue include service center payroll and related employee benefits and service center occupancy costs. Occupancy costs include utilities, rents, real estate and property taxes, repairs and maintenance and depreciation and amortization expenses.

(3) As a percentage of related sales or revenue, as applicable.

(4) As a percentage of earnings from continuing operations before income taxes.

Total revenue for the first nine months of 2012 increased by $1.6 million to $1,559.9 million from $1,558.3 million in the first nine months of 2011, while comparable store sales for the first nine months of 2012 decreased by $28.0 million, or 1.8%, as compared to the first nine months of 2011. The decrease in comparable store sales consisted of a decrease of 2.5% in comparable store merchandise

revenue partially offset by an increase of 0.7% in comparable store service sales. Comparable store merchandise sales consisted of a decrease in customer counts, partially offset by an increase in the average transaction amount per customer. Comparable store service revenue was characterized by an increase in customer counts, partially offset by a decrease in the average transaction amount per customer. While our total revenue figures were favorably impacted by the opening of the 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 $29.6 million of total revenue in the first nine months of 2012 as compared to the prior year period.

Total gross profit decreased by $23.0 million, or 5.8%, to $374.3 million in the first nine months of 2012 from $397.3 million in the first nine months of 2011. Total gross profit margin decreased to 24.0% for the first nine months of 2012 from 25.5% for the first nine months of 2011. Total gross profit for the first nine months of 2012 and 2011 included an asset impairment charge of $8.8 million and $0.4 million, respectively. Excluding the asset impairment charge total gross profit margin decreased by 90 basis points to 24.6% for the first nine months of 2012 from 25.5% in the prior year. The decrease in total gross profit margin, excluding the impairment charge, was primarily due to higher payroll and related expenses as a percent of sales (80 basis points). In addition, product gross margins declined by 20 basis points as the decline in merchandise sales gross margin of 82 basis points was mostly offset by the increase in service revenue product margin primarily due to the shift in sales mix. Merchandise sales product margin declined primarily due to the shift in sales to lower margin tires and oil combined with a decline in tire margins due to cost increases exceeding retail price increases. The new Service & Tire Centers have a higher concentration of their sales in lower margin tires and have higher rent and payroll costs as a percent of total sales. The Service & Tire Centers exclusive of the impairment charge reduced total margins by 168 basis points and 107 basis points in the first nine months of 2012 and 2011, respectively. While the new Service & Tire Centers have had a negative impact on total gross profit margin, these Service & Tire Centers positively contributed to total gross profit in both years.

Gross profit from merchandise sales decreased by $9.7 million, or 2.6%, to $363.3 million for the first nine months of 2012 from $373.0 million in the first nine months of 2011. Gross profit margin from merchandise sales decreased to 29.6% from 30.1% for the prior year period. Gross profit from merchandise sales for the first nine months of 2012 and 2011 included an asset impairment charge of $4.2 million and $0.1 million, respectively. Excluding the asset impairment charge gross profit margin from merchandise sales decreased by 10 basis points to 30.0% for the first nine months of 2012 from 30.1% in the prior year. The decrease in gross profit margin from merchandise sales was due to lower product margins of 82 basis points, as sales mix shifted to lower margin tires and oil, combined with a decline in tire margins due to cost increases exceeding retail price increases and higher warehousing costs (14 basis points) partially offset by lower store occupancy costs such as utilities and depreciation (83 basis points) as a percent of merchandise sales.

Gross profit from service revenue decreased by $13.3 million, or 54.8%, to $11.0 million for the first nine months of 2012 from $24.3 million in the first nine months of 2011. Gross profit margin from service revenue decreased to 3.3% for the first nine months of 2012 from 7.6% in the first nine months of 2011. In accordance with GAAP, service revenue is limited to labor sales (excludes any revenue from installed parts and materials) and costs of service revenues includes the fully loaded service center payroll and related employee benefits and service center occupancy costs. Gross profit from service revenue for the first nine months of 2012 and 2011 included an asset impairment charge of $4.6 million and $0.3 million, respectively. Excluding the asset impairment charge gross profit margin from service revenues decreased by 300 basis points to 4.7% for the first nine months of 2012 from 7.7% in the prior year. The decrease in service revenue gross profit margin was primarily due to the growth of our Service & Tire Centers, which lowered margins by 669 and 499 basis points in the first nine months of 2012 and 2011, respectively. Excluding the impact of Service & Tire Centers, gross profit margin from service revenue decreased to 11.4% for the first nine months of 2012 from 12.7% for the first nine months of 2011. The decrease in gross profit margin, exclusive of Service & Tire Centers, was mostly due to increased payroll and related benefit costs combined with higher store occupancy costs (utilities and depreciation).

Selling, general and administrative expenses, as a percentage of total revenues . . .