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PBY > SEC Filings for PBY > Form 10-K on 18-Apr-2013All Recent SEC Filings

Show all filings for PEP BOYS MANNY MOE & JACK | Request a Trial to NEW EDGAR Online Pro

Form 10-K for PEP BOYS MANNY MOE & JACK


18-Apr-2013

Annual Report


ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

The following discussion and analysis explains the results of our operations for fiscal 2012 and 2011 and developments affecting our financial condition as of February 2, 2013. This discussion and analysis below should be read in conjunction with Item 6 "Selected Consolidated Financial Data," and our consolidated financial statements and the notes included elsewhere in this report. The discussion and analysis contains "forward looking statements" within the meaning of The Private Securities Litigation Reform Act of 1995. Forward looking statements include management's expectations regarding implementation of its long-term strategic plan, future financial performance, automotive aftermarket trends, levels of competition, business development activities, future capital expenditures, financing sources and availability and the effects of regulation and litigation. Actual results may differ materially from the results discussed in the forward looking statements due to a number of factors beyond our control, including those set forth under the section entitled "Item 1A Risk Factors" elsewhere in this report.

Introduction

The Pep Boys-Manny, Moe & Jack and subsidiaries (the "Company") has been the best place to shop and care for your car since it began operations in 1921. Over 19,000 associates are focused on delivering the best customer service in the automotive aftermarket to our customers across our 750+ locations located throughout the United States and Puerto Rico. Pep Boys satisfies all of a customer's automotive needs through our unique offering of service, tires, parts and accessories.

Our stores are organized into a hub and spoke network consisting of Supercenters and Service & Tire Centers. Supercenters average approximately 20,000 square feet (our new Supercenter format is approximately 14,000 square feet) and combine do-it-for-me service labor, installed merchandise and tire offerings ("DIFM") with do-it-yourself parts and accessories ("DIY"). Most of our Supercenters also have a commercial sales program that delivers parts, tires and equipment to automotive repair shops and dealers. Service & Tire Centers, which average approximately 6,000 square feet, provide DIFM services in neighborhood locations that are conveniently located where our customers live or work. Service & Tire Centers are designed to capture market share and leverage our existing Supercenters and support infrastructure. We also operate a handful of legacy DIY only Pep Express stores.

In fiscal 2012, we opened 20 Service & Tire Centers and six Supercenters and converted one Pep Express store into a Supercenter. We also closed four Service & Tire Centers and two Supercenters. As of February 2, 2013, we operated 567 Supercenters, 185 Service & Tire Centers and 6 Pep Express stores located in 35 states and Puerto Rico.

EXECUTIVE SUMMARY

Net earnings for fiscal 2012 were $12.8 million, or $0.24 per share, as compared to $28.9 million, or $0.54 per share, reported for fiscal 2011. Excluding certain unusual items, the year over year decrease in profitability was primarily due to lower total gross profit margins and higher selling, general and administrative expenses, partially offset by increased sales (resulting from the 53rd week in fiscal 2012) and reduced interest expense.

Total revenues (excluding the additional week in fiscal 2012) declined by 0.4% or $ 9.0 million, as compared to the same period in the prior year due to a 2.0% decline in comparable store sales (sales generated by locations in operation during the same period of the prior year) which was partially offset by increased contribution from our non-comparable store locations. This decrease in comparable store


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sales was comprised of a 1.3% increase in comparable store service revenue offset by a 2.9% 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. Consistent with this long-term trend, we have adopted a long-term strategy of growing our automotive service business, while maintaining our DIY customer base by offering the newest and broadest product assortment in the automotive aftermarket.

In the short-term, however, we believe the challenging macroeconomic environment, including persistent high unemployment and negative consumer confidence in the overall U.S. economy, negatively impacted our fiscal year 2012 sales. Another macroeconomic factor affecting our customers and our industry is gasoline prices. Gasoline prices have not only increased to historical highs in recent years, but have also experienced significant spikes in prices during each year. We believe that these gasoline price trends challenged our customer's spending relative to discretionary and deferrable purchases. 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 product assortment, store staffing and advertising messages. In the challenging macroeconomic environment that our customers have experienced in the last few years, we leaned toward a needs-based product assortment, reduced staffing levels and delivered a promotional advertising message. In addition, we work continuously 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 fiscal 2012, we reached another e-SERVE milestone with the launch of buy on-line, ship to home, which 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 are encouraged that during calendar year 2012, miles driven, which favorably impacts sales of our services and non-discretionary products, grew 0.3%, after declining in 2011. For fiscal 2013 and beyond, we are focusing our efforts on ensuring that Pep Boys is the best place to shop and care for your car and are moving our entire business model towards a more focused customer centered strategy. See "ITEM 1 BUSINESS-BUSINESS STRATEGY."

RESULTS OF OPERATIONS

The following discussion explains the material changes in our results of operations for the years ended February 2, 2013 and January 28, 2012 and January 29, 2011.


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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
                                                           Jan 29,        Fiscal      Fiscal
                                                            2011         2012 vs.    2011 vs.
                   Feb 2, 2013         Jan 28, 2012        (Fiscal        Fiscal      Fiscal
Year ended        (Fiscal 2012)        (Fiscal 2011)        2010)          2011        2010
Merchandise
sales                       78.6 %               79.6 %        80.4 %          0.1 %       2.8 %
Service
revenue(1)                  21.4                 20.4          19.6            6.2         7.8

Total revenues             100.0                100.0         100.0            1.3         3.8

Costs of
merchandise
sales(2)                    70.6 (3)             70.3 (3)      69.5 (3)       (0.5 )      (4.0 )
Costs of
service
revenue(2)                  98.3 (3)             95.0 (3)      91.1 (3)       (9.9 )     (12.3 )
Total costs of
revenues                    76.5                 75.3          73.7           (2.9 )      (6.0 )
Gross profit
from
merchandise
sales                       29.4 (3)             29.7 (3)      30.5 (3)       (0.9 )       0.1
Gross profit
from service
revenue                      1.7 (3)              5.0 (3)       8.9 (3)      (64.2 )     (39.0 )
Total gross
profit                      23.5                 24.7          26.3           (3.5 )      (2.5 )
Selling,
general and
administrative
expenses                    22.2                 21.5          22.2           (4.4 )      (0.4 )
Pension
settlement
expense                      0.9                    -             -         (100.0 )         -
Net gain from
disposition of
assets                       0.1                    -           0.1         4772.6       (98.9 )
Operating
profit                       0.6                  3.2           4.2          (82.2 )     (20.6 )
Merger
termination
fees, net                    2.1                    -             -          100.0           -
Non-operating
income                       0.1                  0.1           0.1          (13.5 )     (10.9 )
Interest
expense                      1.6                  1.3           1.3          (29.2 )       1.6
Earnings from
continuing
operations
before income
taxes                        1.1                  2.0           2.9          (45.9 )     (28.8 )
Income tax
expense                     41.5 (4)             30.0 (4)      36.4 (4)      (25.0 )      41.4
Earnings from
continuing
operations                   0.6                  1.4           1.9          (54.8 )     (21.6 )
Discontinued
operations,
net of tax                     -                    -             -           53.0        58.3

Net earnings                 0.6                  1.4           1.8          (55.7 )     (21.1 )


(1)
Service revenue consists of the labor charge for installing merchandise or maintaining or repairing vehicles, excluding the sale of any installed parts or materials.

(2)
Costs of merchandise sales include the cost of products sold, buying, 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.

Fiscal 2012 vs. Fiscal 2011

Total revenue for fiscal 2012 increased by $27.1 million, or 1.3%, to $2,090.7 million from $2,063.6 million for fiscal 2011. Excluding the fifty-third week in 2012, comparable sales decreased 2.0%, consisting of a 1.3% comparable service revenue increase offset by a 2.9% comparable


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merchandise sales decline. Total comparable store sales decreased primarily due to lower customer counts partially offset by an increase in the average transaction amount per customer. While our total revenues 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. The additional week of fiscal 2012 and non-comparable stores contributed an additional $68.2 million of total revenue in fiscal 2012 as compared to the prior year.

Total merchandise sales increased 0.1%, or $1.2 million, to $1,643.9 million for fiscal 2012, compared to $1,642.8 million for fiscal 2011. Excluding the fifty-third week in 2012, comparable merchandise sales decreased by 2.9%, or $46.6 million. 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 and was comprised of a 4.4% decline in merchandise sold through our retail business and a 0.3% decrease in merchandise sold through our service business (resulting primarily from lower tire sales). The fifty third week and our non-comparable stores contributed an additional $47.8 million of merchandise sales.

Total service revenue increased 6.2%, or $25.9 million, to $446.8 million for fiscal 2012 from $420.9 million for fiscal 2011. Excluding the fifty-third week in 2012, comparable service revenue increased by 1.3%, or $5.6 million. The increase in comparable store service revenue was due to higher customer counts partially offset by a decrease in the average transaction amount per customer. The fifty third week and our non-comparable stores contributed an additional $20.4 million of service revenue.

In our retail business, we believe that the difficult macroeconomic conditions continue to impact our customers and led to the comparable store customer counts decline, while we experienced an increase in the average transaction amount per customer resulting from higher selling prices. In our service business, we believe that we experienced an increase in comparable store customer counts due to the strength of our service offering and our promotion of oil changes. However, this shift in service sales mix towards lower cost oil changes reduced the average transaction amount per service customer.

Total gross profit decreased by $18.0 million, or 3.5%, to $491.5 million for fiscal 2012 from $509.5 million for fiscal 2011. Total gross profit margin decreased to 23.5% for fiscal 2012 from 24.7% for fiscal 2011. Total gross profit for fiscal 2012 and 2011 included an asset impairment charge of $10.6 million and $1.6 million, respectively. In addition, fiscal 2011 included a $1.1 million reduction in the reserve for excess inventory. Excluding these items from both years, total gross profit margin decreased by 70 basis points to 24.0% for fiscal 2012 from 24.7% for fiscal 2011. This decrease in total gross profit margin was primarily due to higher payroll and related expenses as a percent of total sales. In addition, the new Service & Tire Centers have a higher concentration of their sales in lower margin tires and oil changes, are leased facilities and are subject to a full payroll burden from their first day of operation. The Service & Tire Centers (exclusive of the impairment charge) reduced total margins by 180 basis points and 100 basis points in 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 $4.5 million, or 0.9%, to $484.0 million for fiscal 2012 from $488.4 million for fiscal 2011. Gross profit margin from merchandise sales decreased to 29.4% for fiscal 2012 from 29.7% in fiscal 2011. Gross profit from merchandise sales in fiscal 2012 and 2011 included an asset impairment charge of $5.1 million and $0.6 million, respectively. In addition, fiscal 2011 included a $1.1 million reduction in the reserve for excess inventory. Excluding these items from both years, gross profit margin from merchandise sales remained relatively flat year over year at 29.7%.

Gross profit from service revenue decreased by $13.5 million, or 64.0%, to $7.5 million for fiscal 2012 from $21.1 million for fiscal 2011. Gross profit margin from service revenue decreased to 1.7% for


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fiscal 2012 from 5.0% for fiscal 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 fiscal 2012 and 2011 included an asset impairment charge of $5.4 million and $1.0 million, respectively. Excluding the asset impairment charge, gross profit margin from service revenue decreased by 234 basis points to 2.9% for fiscal 2012 from 5.3% for fiscal 2011. The decrease in service revenue gross profit margin was primarily due to the growth of our Service & Tire Centers, which lowered margins by 674 and 579 basis points in fiscal 2012 and 2011, respectively. Excluding the impact of the Service & Tire Centers, gross profit margin from service revenue decreased to 9.7% for fiscal 2012 from 11.0% for fiscal 2011. This decrease was due to increased store occupancy costs such as rent and related expenses and utilities.

Selling, general and administrative expenses as a percentage of total revenues increased to 22.2% for fiscal year 2012 from 21.5% for fiscal 2011. Selling, general and administrative expenses for fiscal 2012 increased $19.4 million, or 4.4%, to $463.4 million from $444.0 million for fiscal 2011. The increase resulted primarily from higher media expense of $8.4 million, higher store and administrative payroll and related expense of $10.4 million (partially from the additional week in fiscal 2012) and higher legal and professional services costs of $2.3 million, which were partially offset by lower credit card transaction fees of $3.6 million and the reversal of compensation expense of $0.9 million related to previously issued performance based stock grants. In addition, in fiscal 2011 we recorded a reduction to the contingent consideration of $0.7 million related to one of our acquisitions.

In the second quarter of fiscal 2012, we terminated our proposed "go private" transaction and recorded the settlement proceeds, net of merger related costs, of $42.8 million in the consolidated statement of operations and comprehensive income.

In the third quarter of fiscal 2012, we restructured our long term debt to reduce the amount outstanding by $95.1 million and lower our annual interest expense by approximately $11.0 million. Accordingly, the write-off of deferred financing costs along with the cost to settle the interest rate swap on the previous debt, partially offset by our lower total debt and reduced interest rate, caused our interest expense for fiscal 2012 to increase by $7.7 million to $34.0 million as compared to the $26.3 million for fiscal 2011 (See Note 5 to the Consolidated Financial Statements).

In the fourth quarter of fiscal 2012, we sold our regional administration building in Los Angeles, CA, which resulted in a net gain from disposition of assets to increase by $1.3 million in fiscal 2012.

In the fourth quarter of fiscal 2012, in accordance with Internal Revenue Service and Pension Benefit Guaranty Corporation requirements, we contributed $14.1 million to fully fund its Defined Benefit Pension Plan on a termination basis and incurred a settlement charge of $17.8 million (see Note 13 to the Consolidated Financial Statements).

Our income tax expense for fiscal 2012 was $9.3 million, or an effective rate of 41.5%, as compared to an expense of $12.5 million, or an effective rate of 30.0%, for fiscal 2011. The change was primarily due to a benefit of $3.6 million related to the release of valuation allowances on certain state net operating loss carry forwards and credits in fiscal 2011. In addition, the rate change from period to period is 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 net earnings of $12.8 million for fiscal 2012 as compared to net earnings of $28.9 million for fiscal 2012. Our diluted earnings per share were $0.24 as compared to $0.54 in the prior year period.


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Fiscal 2011 vs. Fiscal 2010

Total revenue for fiscal 2011 increased by 3.8%, or $75.0 million, to $2,063.6 million from $1,988.6 million in fiscal 2010, while comparable store sales for fiscal 2011 decreased 0.6% as compared to the prior year. This decrease in comparable store sales consisted of an increase of 0.6% in comparable store service revenue offset by a decrease of 0.9% in comparable store merchandise sales. Total comparable store sales decreased due to lower customer counts in all three lines of business 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 $86.6 million of total revenue in fiscal 2011 as compared to the prior year.

Total merchandise sales increased 2.8%, or $44.6 million, to $1,642.8 million in fiscal 2011, compared to $1,598.2 million in fiscal 2010. The increase in merchandise sales was due to our non-comparable stores which contributed an additional $58.4 million of sales during the year, partially offset by a decline in comparable store merchandise sales of 0.9%, or $13.8 million. The decrease in comparable store merchandise sales was comprised of a 2.3% decline in our retail business which was mostly offset by a 1.9% increase in merchandise sold through our service business as a result of increased tire and installed part sales. Total service revenue increased 7.8%, or $30.4 million, to $420.9 million in fiscal 2011 from $390.5 million in the prior year. The increase in service revenue was comprised of a $2.2 million, or 0.6%, increase in comparable store service revenue and $28.2 million of service revenue from our new non-comparable stores.

We believe that 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 product acquisition costs. We believe the significant increase in gasoline prices led to a decline in miles driven, which combined with the financial burden of higher gasoline prices, continued high unemployment and negative consumer confidence in the overall U.S. economy depressed our fiscal 2011 sales. These negative economic conditions were somewhat mitigated by the continued aging of the U.S. light vehicle fleet as consumers spent more money on maintaining their vehicles as opposed to buying new vehicles. Over the long-term, we believe utilizing innovative marketing programs to communicate our value-priced, differentiated service and merchandise assortment will drive increased customer counts and 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 $12.8 million, or 2.5%, to $509.5 million in fiscal 2011 from $522.4 million in fiscal 2010. Total gross profit margin decreased to 24.7% for fiscal 2011 from 26.3% for fiscal 2010. The decrease in total gross profit margin was primarily due to the opening or acquisition of new Service & Tire Centers. The 85 Big 10 locations acquired in the second quarter of 2011 lowered total gross profit margin for fiscal 2011 by 50 basis points. The Big 10 locations were dilutive to total gross profit margin primarily due to mix of sales being more highly concentrated in tires which have lower product margins combined with higher rent and payroll costs as a percent of total sales. The organic new stores opened by the Company, which 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), negatively affected total gross profit margin by 81 basis points and 42 basis points for fiscal 2011 and 2010, respectively. The current year also included a net charge of $0.5 million comprised of a $1.6 million asset impairment charge which was mostly offset by a $1.1 million reduction in the reserve for excess inventory. The prior year included a net benefit of $5.9 million comprised of a reduction in the reserve for excess inventory of $5.9 million and a $1.0 million reversal of an inventory accrual partially offset by an asset impairment charge of $1.0 million. Excluding the impact of both the acquired and the new organic Service & Tire Centers and the unusual items noted above, the total gross profit margin declined by 33 basis points to 26.1% from 26.4% in the prior year.


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This decline was mostly due to a shift in sales to lower margin tires and increased tire pricing pressure. 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 increased by $0.6 million, or 0.1%, to $488.4 million for fiscal 2011 from $487.8 million in fiscal 2010. Gross profit margin from merchandise sales decreased to 29.7% from 30.5% for the prior year. Gross profit from merchandise sales for fiscal 2011 included a $1.1 million reduction in our reserve for excess inventory and an asset impairment charge of $0.6 million. Gross profit from merchandise sales for fiscal 2010 included a net benefit of $6.2 million comprised of a $5.9 million reduction in our reserve for excess inventory and the reversal of an inventory related accrual of approximately $1.0 million partially offset by a $0.8 million asset impairment charge. Excluding these items from both years, gross profit margin from merchandise sales decreased by 44 basis points to 29.7% in fiscal 2011 from 30.1% in the prior year primarily due to a decrease in product gross margins of 50 basis points. The decrease in product gross margins was primarily due to a shift in sales to lower margin tires and increased tire pricing pressure.

Gross profit from service revenue decreased by $13.5 million, or 39.0%, to $21.1 million for fiscal 2011 from $34.6 million in fiscal 2010. Gross profit margin from service revenue decreased to 5.0% from 8.9% for the prior year. 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. Gross profit from service revenue for fiscal 2011 and 2010 included a $1.0 million and $0.2 million asset impairment charge, respectively. Excluding the charge from both years, gross profit margin from service revenue decreased to 5.25% for fiscal 2011 from 8.9% in the prior year. The decrease in gross profit from service revenue was due to the opening or acquisition of new Service & Tire Centers. Excluding the impact of the acquired and new Service & Tire Centers, (which are in their ramp up stage for sales while incurring their full amount of fixed expenses, including payroll and occupancy costs) and the impairment charge, gross profit from service revenue increased to 11.3% for fiscal 2011 from 10.6% for fiscal 2010. The increase in gross profit was primarily due to increased service revenues which better leveraged fixed store occupancy costs, partially offset by an increase in payroll and occupancy costs.

Selling, general and administrative expenses as a percentage of revenue decreased to 21.5% in fiscal 2011 from 22.2% in fiscal 2010. Selling, general and administrative expenses increased $1.7 million, or 0.4%, to $444.0 million. The increase was primarily due to higher general liability and workers compensation claims expense of $4.8 million related to a favorable actuarial . . .

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