Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
PBY > SEC Filings for PBY > Form 10-Q on 11-Jun-2013All Recent SEC Filings

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

Form 10-Q for PEP BOYS MANNY MOE & JACK


11-Jun-2013

Quarterly Report


ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

The following discussion and analysis explains the results of operations for the first quarter of fiscal 2013 and 2012 and significant developments affecting our financial condition as of May 4, 2013. 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 February 2, 2013.

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 the first quarter of 2013, we opened four Service & Tire Centers and two Supercenters. We also closed one Service & Tire Center. As of May 4, 2013, we operated 569 Supercenters, 188 Service & Tire Centers and six Pep Express stores located in 35 states and Puerto Rico.

EXECUTIVE SUMMARY

Net earnings for the first quarter of 2013 were $3.9 million, or $0.07 per share, as compared to $1.1 million, or $0.02 per share, reported for the first quarter of 2012. Current period net earnings include a $3.8 million tax benefit due to state hiring credits recorded in the first quarter of 2013. Earnings from continuing operations before income taxes and discontinued operations decreased by $1.7 million to $0.2 million in the first quarter of 2013 as compared to $1.9 million in the first quarter of 2012. This decrease was due to lower total gross margin, partially offset by increased revenues, lower selling, general and administrative expenses and reduced interest expense.

Total revenues increased for the first quarter of 2013 by 2.2%, or $11.6 million, as compared to the first quarter of 2012 due to a 1.0% increase in comparable store sales and the contribution from our non-comparable store locations. This increase in comparable store sales (sales generated by locations in operation during the same period of the prior year) was comprised of a 4.2% increase in comparable store service revenues and a 0.1% increase 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, various factors within the economy affect both our customers and our industry, including the impact of the recent recession, continued high unemployment and the restoration of payroll taxes back to previous levels. 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 customers' spending relative to discretionary and deferrable purchases. In addition, gasoline prices impact miles driven which, in turn, impact sales of our services and non-discretionary products. 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. 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


Table of Contents

Pep Boys the most convenient place to shop for all of their automotive needs. Our more focused customer-centered strategy to ensure that Pep Boys is the best place to shop and care for your car is beginning to take hold. In the first quarter of 2013, it led to increased customer traffic in our service center line of business. We are optimistic that our efforts to build long lasting relationships with all of our customers, along with offering solutions for all of their automotive needs will yield consistent sales growth in all lines of business.

RESULTS OF OPERATIONS

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

Analysis of Statement of Operations

Thirteen weeks ended May 4, 2013 vs. Thirteen weeks ended April 28, 2012

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
                                              May 4, 2013      April 28, 2012         Favorable
Thirteen weeks ended                         (Fiscal 2013)     (Fiscal 2012)        (Unfavorable)

Merchandise sales                                     77.8 %             78.6 %                 1.2 %
Service revenue (1)                                   22.2               21.4                   6.0
Total revenues                                       100.0              100.0                   2.2
Costs of merchandise sales (2)                        71.2 (3)           70.5 (3)              (2.1 )
Costs of service revenue (2)                          98.7 (3)           94.5 (3)             (10.7 )
Total costs of revenues                               77.3               75.7                  (4.4 )
Gross profit from merchandise sales                   28.8 (3)           29.5 (3)              (1.0 )
Gross profit from service revenue                      1.3 (3)            5.5 (3)             (74.9 )
Total gross profit                                    22.7               24.3                  (4.6 )
Selling, general and administrative
expenses                                              22.1               22.8                   1.3
Net loss from dispositions of assets                     -                  -                     -
Operating profit                                       0.7                1.5                 (55.7 )
Non-operating income                                   0.1                0.1                 (19.6 )
Interest expense                                       0.7                1.2                  43.5
Earnings from continuing operations
before income taxes                                      -                0.4                 (88.4 )
Income tax (benefit) expense                           N/M (4)           40.1 (4)             588.7
Earnings from continuing operations                    0.7                0.2                 246.2
Discontinued operations, net of tax                      -                  -                  10.8
Net earnings                                           0.7                0.2                 263.8



(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, 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. The percentage for the first quarter of 2013 is not meaningful.

Total revenues for the first quarter of 2013 increased by 2.2%, or $11.6 million, to $536.2 million from $524.6 million in the first quarter of 2012. Comparable store sales for the first quarter of 2013 increased 1.0% as compared to the first quarter of 2012. This increase in comparable store sales consisted of an increase of 4.2% in comparable store service revenue and an increase of 0.1% in comparable store merchandise sales. Total comparable store sales increased due to an increase in the average transaction amount per customer partially offset by lower customer counts. 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. Non-comparable stores contributed an additional $6.4 million of total revenues in the first quarter of 2013 as compared to the first quarter of 2012.


Table of Contents

Total merchandise sales increased 1.2%, or $4.8 million, to $417.2 million in the first quarter of fiscal 2013, compared to $412.3 million during the prior year quarter. Comparable store merchandise sales increased by 0.1%, or $0.5 million, primarily due to a higher average transaction amount per customer, offset by lower comparable store customer counts. The increase was comprised of a 3.7% increase in merchandise sold through our service business offset by a 2.1% decrease in merchandise sold through our retail business. Non-comparable stores contributed an additional $4.3 million of merchandise sales during the quarter.

Total service revenue increased 6.0%, or $6.8 million, to $119.0 million in the first quarter of 2013 from the $112.3 million during the prior year quarter. Comparable store service revenue increased by 4.2%, or $4.7 million, primarily due to higher customer counts, as the average transaction amount per customer remained relatively flat. Non-comparable stores contributed an additional $2.1 million of service revenue.

In our retail business, we believe that the difficult macroeconomic conditions continued to impact our customers and led to the comparable store customer counts decline. The increase in the average transaction amount per customer resulted from higher selling prices. In our service business, we believe the increase in comparable store customer counts was due to the strength of our service offering and the heavy promotion of oil changes. However, this shift in service sales mix toward lower cost oil changes reduced the average transaction amount per service customer. The promotion of these oil changes is designed to attract new service customers to Pep Boys in order to introduce them to our full service capabilities in order to satisfy their future needs.

Total gross profit decreased by $5.8 million, or 4.6%, to $121.8 million in the first quarter of 2013 from $127.7 million in the first quarter of 2012. Total gross profit margin decreased to 22.7% for the first quarter of 2013 from 24.3% for the first quarter of 2012. Excluding the impairment charge of $1.2 million in the first quarter of 2013, total gross profit margin decreased by 140 basis points to 22.9% for fiscal 2013 from 24.3% in fiscal 2012. This decrease in total gross profit margin was primarily due to higher payroll and related expenses of 90 basis points (up-front investment in our technicians to satisfy future customer traffic), lower product gross margins of 20 basis points (lower merchandise margins of 80 basis points due to increased promotional activity offset by a sales shift to higher margin service revenues) and higher occupancy costs (rent, utilities and depreciation) of 30 basis points. 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 190 basis points in 2013 and 2012, respectively. While the new Service & Tire Centers had a negative impact on total gross profit margin, these Service & Tire Centers positively contributed to total gross profit in fiscal 2013.

Gross profit from merchandise sales decreased by $1.2 million, or 1.0%, to $120.3 million for the first quarter of 2013 from $121.5 million in the first quarter of 2012. Gross profit margin from merchandise sales decreased to 28.8% for the first quarter of 2013 from 29.5% for the first quarter of 2012. Excluding the impairment charge of $0.2 million in the first quarter of 2013, gross profit margin from merchandise sales decreased by 60 basis points to 28.9% for fiscal 2013 from 29.5% in fiscal 2012. The decrease in gross profit margin was primarily due to a decline in product gross margins of 70 basis points (increased promotional activity) partially offset by lower store occupancy costs of 16 basis points (lower depreciation expense).

Gross profit from service revenue decreased by $4.6 million, or 74.9%, to $1.5 million in the first quarter of 2013 from $6.2 million in the first quarter of 2012. Gross profit margin from service revenue decreased to 1.3% for the first quarter of 2013 from 5.5% 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 revenue includes the fully loaded service center payroll, and related employee benefits, and service center occupancy costs (rent, utilities and building maintenance). Excluding the impairment charge of $1.0 million in the first quarter of 2013, gross profit margin from service revenue decreased by 330 basis points to 2.2% for fiscal 2013 from 5.5% in fiscal 2012. Excluding the impact of Service & Tire Centers (which reduced margins by 702 basis points and 712 basis points in 2013 and 2012, respectively) and the impairment charge, gross profit from service revenue decreased to 9.2% for the first quarter of 2013 from 12.6% for the first quarter of 2012. This decrease in gross profit of 340 basis points was primarily due to higher payroll and related expense of 175 basis points (up-front investment in our technicians to satisfy future customer traffic) and higher occupancy costs of 160 basis points (depreciation and utilities).

Selling, general and administrative expenses as a percentage of total revenues decreased to 22.1% for the first quarter of 2013 from 22.8% for the first quarter of 2012. Selling, general and administrative expenses decreased $1.5 million, or 1.3%, to $118.2 million in the first quarter of 2013 from $119.7 million in the prior year quarter primarily due to lower media expense of $2.5 million and lower merger related costs of $1.6 million, partially offset by higher legal and professional services costs of $1.6 million and higher credit card fees of $0.7 million.

Interest expense for the first quarter of 2013 was $3.7 million, a decrease of $2.8 million compared to the $6.5 million reported for the first quarter of 2012. The decrease in interest expense is due to the debt refinancing completed in the third quarter of 2012 which reduced the total debt outstanding by approximately $95.1 million and lowered the interest rate.


Table of Contents

We reported an income tax benefit of $3.7 million for the first quarter of 2013 as compared to an expense of $0.8 million in the first quarter of 2012. We recognized a $3.8 million tax benefit due to non-expiring state hiring credits recorded in the first quarter of 2013, the cash benefit of which is not expected to be utilized within the next 12 months. 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 $3.9 million in the first quarter of 2013 as compared to net earnings of $1.1 million in the prior year period. Our basic and diluted earnings per share were $0.07 for the first quarter of 2013 as compared to $0.02 for the first quarter of 2012.

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 Service or Retail area of the business. We believe that operation in both the Service and Retail 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. Our Service Center business competes in the Service area of the industry. We compete in the Retail area of the business through our retail sales floor and commercial sales business.

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

                                                    Thirteen weeks ended
(dollar amounts in thousands)                  May 4, 2013     April 28, 2012

Service Center Revenue (1)                     $    286,978   $        271,089
Retail Sales (2)                                    249,195            253,515
Total revenues                                 $    536,173   $        524,604

Gross profit from Service Center Revenue (3)   $     51,995   $         53,888
Gross profit from Retail Sales (3)                   69,845             73,764
Total gross profit                             $    121,840   $        127,652



(1) Includes revenues from installed products.
(2) Excludes revenues from installed products.
(3) Gross profit from Service Center Revenue includes the cost of installed products sold, purchasing, warehousing, 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. Gross profit from Retail Sales includes the cost of products sold, purchasing, warehousing and store occupancy costs.

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 $9.4 million in the first quarter of 2013, as compared to $38.0 million in the prior year period. The $28.6 million decrease from the prior year period was due to an unfavorable change in operating assets and liabilities of $29.1 million, slightly offset by increased net earnings, net of non-cash adjustments of $0.6 million. The change in operating assets and liabilities was primarily due to an unfavorable change in accrued expenses and other current assets of $15.7 million; inventory, net of accounts payable, of $11.6 million; and other long-term liabilities of $1.8 million. The change in accrued expenses was primarily due to a decrease in employee payroll and related tax accruals of $16.5 million due to the timing of payments.

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 used in accounts payable was $0.1 million in 2013 as compared to cash generated from accounts payable of $33.3 million for 2012. The ratio of accounts payable, including our trade payable program, to inventory was 60.9% as of May 4, 2013, 61.5% as of February 2, 2013, and 57.7% as of April 28, 2012.


Table of Contents

Cash used in investing activities was $11.8 million in the first quarter of 2013 as compared to $11.9 million in the prior year period. Capital expenditures were $12.8 million and $11.9 million in the first quarter of 2013 and 2012, respectively. Capital expenditures for the first quarter of 2013, in addition to our regularly scheduled store, distribution center improvements and information technology enhancements, included the addition of four new Service & Tire Centers and two new Supercenters. Capital expenditures for the first quarter of 2012 included the addition of four new Service & Tire Centers. During the first quarter of 2013, we received $1.0 million of previously posted collateral for retained liabilities related to existing insurance programs.

Our targeted capital expenditures for fiscal 2013 are $65.0 million. Our fiscal 2013 capital expenditures include the addition of approximately 38 new locations, the conversion of 15 Supercenters into Superhubs, the addition of 50 Speed Shops to existing Supercenters 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 2013, cash used in financing activities was $0.7 million, as compared to cash provided by financing activities of $15.1 million in the prior year period. The cash used in financing activities in the first quarter of 2013 was primarily related to principal payments of $0.5 million on our Term Loan. The cash provided by financing activities in the first quarter of 2012 was primarily related to $15.2 million of net borrowings on our trade payable program. 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 May 4, 2013 and February 2, 2013, we had an outstanding balance of $149.4 million and $149.7 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 2013. In addition, we expect to have excess availability under our existing revolving credit agreement during the entirety of fiscal 2013. As of May 4, 2013, we had zero drawn on our revolving credit facility and maintained undrawn availability of $144.8 million.

Our working capital was $138.1 million and $126.5 million as of May 4, 2013 and February 2, 2013, respectively. Our total debt, net of cash on hand, as a percentage of our net capitalization, was 20.9% and 20.8% as of May 4, 2013 and February 2, 2013, respectively.

NEW ACCOUNTING STANDARDS

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management's Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to customer incentives, product returns and warranty obligations, bad debts, inventories, income taxes, financing operations, restructuring costs, retirement benefits, share-based compensation, risk participation agreements, contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. For a detailed discussion of significant accounting policies that may involve a higher degree of judgment or complexity, refer to "Critical Accounting Policies and Estimates" as reported in our Annual Report on Form 10-K for the fiscal year ended February 2, 2013.


Table of Contents

FORWARD-LOOKING STATEMENTS

Certain statements contained herein constitute "forward-looking statements" within the meaning of The Private Securities Litigation Reform Act of 1995. The words "guidance," "expect," "anticipate," "estimates," "targets," "forecasts" . . .

  Add PBY to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for PBY - All Recent SEC Filings
Sign Up for a Free Trial to the NEW EDGAR Online Pro
Detailed SEC, Financial, Ownership and Offering Data on over 12,000 U.S. Public Companies.
Actionable and easy-to-use with searching, alerting, downloading and more.
Request a Trial      Sign Up Now


Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.