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PART IV

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10K

(Mark One)    

ý

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended February 2, 2013

OR

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to            

Commission file number 1-3381

The Pep Boys—Manny, Moe & Jack
(Exact name of registrant as specified in its charter)

Pennsylvania
(State or other jurisdiction of
incorporation or organization)
  23-0962915
(I.R.S. employer
identification no.)

3111 West Allegheny Avenue,

 

 
Philadelphia, PA
(Address of principal executive office)
  19132
(Zip code)

215-430-9000
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class   Name of each exchange on which registered
Common Stock, $1.00 par value   New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:
None

         Indicate by check mark whether the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o    No ý

         Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o    No ý

         Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

         Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý    No o

         Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý

         Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o   Accelerated filer ý   Non-accelerated filer o
(Do not check if a
smaller reporting company)
  Smaller reporting company o

         Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) Yes o    No ý

         As of the close of business on July 27, 2012 the aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $457,164,000.

         As of April 5, 2013, there were 53,176,348 shares of the registrant's common stock outstanding.

   


Table of Contents


TABLE OF CONTENTS

 
   
  Page  

PART I

           

Item 1.

 

Business

    1  

Item 1A.

 

Risk Factors

    10  

Item 1B.

 

Unresolved Staff Comments

    14  

Item 2.

 

Properties

    14  

Item 3.

 

Legal Proceedings

    15  

Item 4.

 

Mine Safety Disclosures

    15  

PART II

           

Item 5.

 

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

    15  

Item 6.

 

Selected Financial Data

    17  

Item 7.

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

    19  

Item 7A.

 

Quantitative and Qualitative Disclosures About Market Risk

    35  

Item 8.

 

Financial Statements and Supplementary Data

    36  

Item 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

    75  

Item 9A.

 

Controls and Procedures

    75  

Item 9B.

 

Other Information

    79  

PART III

           

Item 10.

 

Directors, Executive Officers and Corporate Governance

    79  

Item 11.

 

Executive Compensation

    79  

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

    79  

Item 13.

 

Certain Relationships and Related Transactions and Director Independence

    79  

Item 14.

 

Principal Accounting Fees and Services

    79  

PART IV

           

Item 15.

 

Exhibits and Financial Statement Schedules

    80  

 

Signatures

    83  

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PART I

ITEM 1    BUSINESS

GENERAL

        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 for 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, accessories and knowledge.

        Our stores are organized in 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, work and shop. 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.

        The following table sets forth the percentage of total revenues from continuing operations contributed by each class of similar products or services for the Company and should be read in conjunction with the Consolidated Financial Statements and Notes thereto included elsewhere herein:

 
  Year ended  
 
  February 2,
2013
  January 28,
2012
  January 29,
2011
 

Parts and accessories

    59.9 %   61.0 %   63.5 %

Tires

    18.7     18.6     16.9  
               

Total merchandise sales

    78.6     79.6     80.4  

Service labor

    21.4     20.4     19.6  
               

Total revenues

    100.0 %   100.0 %   100.0 %
               

        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, the Company operated 567 Supercenters, 185 Service & Tire Centers and six Pep Express stores located in 35 states and Puerto Rico. These locations consist of approximately 12,780,000 of gross square feet of retail space, including over 7,300 service bays.

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        The following table indicates, by state, the number of stores the Company had in operation at the end of each of the last four fiscal years, and the number of stores opened and closed by the Company during each of the last three fiscal years:


NUMBER OF STORES AT END OF FISCAL YEARS 2009 THROUGH 2012

State
  2012
Year
End
  Opened   Closed   2011
Year
End
  Opened   Closed   2010
Year
End
  Opened   Closed   2009
Year
End
 

Alabama

    38     1         37     36         1             1  

Arizona

    22             22             22             22  

Arkansas

    1             1             1             1  

California

    131     1         130     4     3     129     6     1     124  

Colorado

    7             7             7             7  

Connecticut

    7             7             7             7  

Delaware

    9     1         8     1         7             7  

Florida

    91     5     4     90     30         60     7         53  

Georgia

    49     3     1     47     22         25     3         22  

Illinois

    35     3         32     3         29     4         25  

Indiana

    7             7             7             7  

Kentucky

    4             4             4             4  

Louisiana

    8             8             8             8  

Maine

    1             1             1             1  

Maryland

    20             20     1         19     1         18  

Massachusetts

    7             7             7     1         6  

Michigan

    5             5             5             5  

Minnesota

    3             3             3             3  

Missouri

    1             1             1             1  

Nevada

    12             12             12             12  

New Hampshire

    4             4             4             4  

New Jersey

    40     4         36     4         32     1         31  

New Mexico

    8             8             8             8  

New York

    37     4         33     2         31     2         29  

North Carolina

    8             8             8             8  

Ohio

    12             12             12     2         10  

Oklahoma

    5             5             5             5  

Pennsylvania

    55     2         53     2         51     6         45  

Puerto Rico

    27             27             27             27  

Rhode Island

    2             2             2             2  

South Carolina

    6             6             6             6  

Tennessee

    7     1     1     7             7             7  

Texas

    57     1         56     7         49     2         47  

Utah

    6             6             6             6  

Virginia

    17             17     1         16             16  

Washington

    9             9     7         2             2  
                                           

Total

    758     26     6     738     120     3     621     35     1     587  
                                           

        We are targeting a total of 31 new Service & Tire Centers and seven Supercenters in fiscal 2013. We expect to lease new Service & Tire Center and Supercenter locations, as we believe that there are sufficient existing available locations in the marketplace with attractive lease terms to enable our expansion.

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INDUSTRY OVERVIEW

        The automotive aftermarket industry is in the mature stage of its life cycle and while the DIY space is dominated by a small number of companies with large market shares, the DIFM or automotive service business is highly fragmented. Over the past decade, consumers have moved away from DIY and toward DIFM due to increasing vehicle complexity and electronic content, and decreasing availability of diagnostic equipment and know-how. In addition, while this needs-based industry has a dedicated DIY customer base, the number of consumers who would prefer to have a professional fix their vehicle fluctuates with economic cycles. For example, a drop in disposable income during the recession forced some former DIFM consumers to work on their own vehicles, resulting in short-term growth in the DIY market. During this period, weak labor and credit markets depressed new vehicles sales, thereby increasing the average length of vehicle ownership. This increase in the average age of vehicles on the road also aided the short-term growth of the DIY industry as those owners of older vehicles were more likely to work on their own vehicles. While new car sales started to rebound in 2011 and gained further momentum in 2012, new car sales still remain significantly below historical levels. As the broader economic recovery continues, we expect consumers to once again shift away from DIY and toward DIFM and to continue to do so for the foreseeable future. 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.

BUSINESS STRATEGY

        All of our efforts are focused on ensuring that Pep Boys is the best place to shop and care for your car. The legacy of our founders—Manny, Moe & Jack—has inspired us since 1921 to deliver passionate customer service. We are people taking care of people ... and their cars. More than just words, we are moving our entire business model towards a more focused customer centered strategy. We have added a Chief Customer Officer to our senior executive team to help guide the development of our strategy around our target customer segments. We also recently introduced a new Senior Vice President of Stores with a strong background in delivering world-class customer service. The following strategies have been developed and prioritized to support our vision and, in turn, our ultimate goal as a public company of maximizing shareholder value.

        Attract, develop and retain the best people.    We need the best people to care for our customers and their cars. This process begins with their recruitment and continues throughout their tenure as Pep Boys associates. We are constantly reviewing and improving our hiring process to include updated core competency and positional profiles and pre-hire assessment screening. Once hired, a Pep Boys associate has the opportunity to participate in a variety of classroom and online skills and leadership training and to develop a career path with us. We also offer performance-based compensation programs designed to reward the delivery of the passionate customer service that is the centerpiece of our vision.

        Grow where our target customers live, work and shop.    We achieve this through both our physical locations and online presence. We have researched and developed proprietary customer segment targets that we believe will allow us to maximize our profitability. We have begun the process of analyzing our existing store base to ensure that our stores are located where these target customers live, work and shop. Our store growth and any rationalization of our current store base will be designed to optimize the proximity of these locations to our target customers. Similarly, our online presence, which we call e-SERVE, is developed around making it easier for our target customers to do business with us. Pepboys.com (including our mobile device version) allows our customers to learn about the breadth and depth of our service and product offerings, schedule service appointments and purchase products for in store or home delivery.

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        Deliver customer experiences that are "beyond expectations".    We strive to be friendly, do it right, show compassion and keep promises with each and every customer. We are in the early stages of a new training program designed to teach our associates how to enhance the customer experience through building relationships with our customers. Before addressing a customer's immediate need, our associates are being taught to build rapport with the customer that will not only lead to customer satisfaction with the current transaction, but will lead to the customer choosing Pep Boys for all of their automotive needs in the future. Information gathered through our rewards program, customer surveys and focus groups helps us to understand the customer experience that our target customer segments expect and the services and products that will best meet their needs and desires.

        Provide the best assortment and shopping experience in the automotive aftermarket.    We begin by being a full service—tire, maintenance and repair—shop. Our full service capabilities, ASE (Automotive Service Excellence) certified technicians and continuous investment in training and equipment allow customers to rely on us for all of their automotive maintenance and repair needs—from replacing the oil in their engine to replacing the engine itself. By offering a broad assortment of branded and private label products, we enjoy a competitive advantage over many of our DIFM competitors.

        The size of our Supercenters allows us to provide the highest level of replacement parts coverage and the broadest range of maintenance, performance and appearance products and accessories in the industry. We are able to leverage our Superhub stores, which have a larger assortment of product than our normal Supercenter, to satisfy customer needs for slow-moving product by delivering this product to requesting Supercenters on demand. We are also expanding our Speed Shops, a store-in-a-store within existing Supercenters that creates a differentiated retail experience for automotive enthusiasts by stocking high-performance and specialty products. We are similarly focused on price optimization and inventory rationalization opportunities.

        We are currently testing a new market concept that we call "The Road Ahead," which recently began with a re-grand opening of our West Hillsboro, Florida location. Designed around the shopping habits of our target customer segments, this concept enhances the entire store—our people, the product assortment, its exterior and interior look and feel and the marketing programs—to learn how we can be successful in attracting more of these target customers and earn a greater share of their annual spend in the automotive aftermarket.

        Tell our story internally and externally.    It is essential to our success that our associates and consumers understand our vision and brand position. In recent years, our brand position has been PEP BOYS DOES EVERYTHING. FOR LESS. This positioning was designed to convey to consumers the breadth and depth of the automotive services and products that we offer and our value proposition. As we believe that consumers have now come to understand the breadth and depth of our offerings and give us credit for our value proposition, our attention has turned to focusing on the customer experience that we believe our target customer segments desire, but have been unable to find in the automotive aftermarket. Consistent with our strategy described above, our brand positioning in fiscal 2013 will begin to shift from a more promotional message to a more customer service oriented message. We are conveying this message to our associates through corporate communications and leadership training. Meanwhile, we are developing tailored marketing plans for our target customer segments. These marketing programs will include TV and radio promotions and be complemented with digital media, direct marketing, grass-roots and print campaigns.

STORE IMPROVEMENTS

        In fiscal 2012, our capital expenditures totaled $54.7 million which, in addition to our regularly-scheduled facility improvements, included the addition of 20 Service & Tire Centers, six Supercenters, the conversion of seven Supercenters into Superhubs, the addition of 17 Speed Shops within existing

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Supercenters and information technology enhancements including our eCommerce initiatives and parts catalog enhancements. Our fiscal 2013 capital expenditures are expected to be approximately $65.0 million, which includes the planned addition of 31 Service & Tire Centers, seven Supercenters, the conversion of 15 Supercenters into Superhubs and the addition of 50 Speed Shops within existing Supercenters. These expenditures are expected to be funded from cash on hand and net cash generated from operating activities. Additional capacity, if needed, exists under our revolving credit facility.

SERVICES AND PRODUCTS

        As of February 2, 2013, we operated a total of 7,303 service bays in 752 of our 758 locations. Each service location performs a full range of automotive maintenance and repair services (except body work) and installs tires, parts and accessories.

        Each Pep Boys Supercenter and Pep Express store carries a similar product line, with variations based on the number and type of cars in the market where the store is located, while a Pep Boys Service & Tire Center carries tires and a limited selection of our products. A full complement of inventory at a typical Supercenter includes an average of approximately 28,000 items, while Service & Tire Centers average approximately 2,000 items. Our product lines include: tires (not stocked at Pep Express stores); batteries; new and remanufactured parts for domestic and import vehicles; chemicals and maintenance items; fashion, electronic, and performance accessories; and select non-automotive merchandise that appeals to our target customer segments.

        In addition to offering a wide variety of high quality name brand products, we sell an array of high quality products under various private label names. We sell tires under the names DEFINITY, FUTURA® and CORNELL®, and batteries under the name PROSTART®. We also sell wheel covers under the name FUTURA®; air filters, anti-freeze, chemicals, cv axles, hub assemblies, lubricants, oil, oil filters, oil treatments, transmission fluids, custom wheels and wiper blades under the name PROLINE®; alternators, battery booster packs, alkaline type batteries and starters under the name PROSTART®; power steering hoses, chassis parts and power steering pumps under the name PROSTEER®; brakes under the name PROSTOP® and brakes, batteries, starters, ignitions and chassis under the name VALUEGRADE. All products sold by the Company under various private label names were approximately 24% of our merchandise sales in fiscal 2012, 26% in 2011, and 31% in 2010. The decline in the mix of private label merchandise sales is primarily due to the addition of popular branded tires.

        Our commercial automotive parts delivery program, branded PEP EXPRESS PARTS®, is designed to increase our market share with the professional installer and to leverage our inventory investment. The program satisfies the commercial customer's automotive inventory needs by taking advantage of the breadth and quality of Pep Boys' parts inventory as well as its experience supplying its own service bays and mechanics. As of February 2, 2013, approximately 80% or 458 of our 573 Supercenters and Pep Express stores provided commercial parts delivery as compared to approximately 81% or 459 stores at the end of fiscal 2011.

        We have a point-of-sale system in all of our stores, which gathers sales and inventory data by stock-keeping unit from each store on a daily basis. This information is then used to formulate pricing, inventory, marketing and merchandising strategies. We have an electronic parts catalog that allows our associates to efficiently look up the parts that our customers need and to provide complete job solutions, advice and information for customers' vehicles. We have an electronic work order system in all service centers; this system creates a service history for each vehicle, provides customers with a comprehensive sales document and enables us to maintain a service customer database.

        We use a competitive pricing strategy, setting prices based upon market forces and then complementing them with promotions. We believe that targeted advertising and promotions play important roles in succeeding in today's environment. We are constantly working to understand our

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target customer segments' needs and desires, so that we can deliver outstanding customer service and build long-lasting, loyal relationships with them. We utilize advertising, promotions and a loyalty card program (Rewards) to convey our commitment to customer service and to promote our service and repair capabilities and product offerings. We are committed to an effective multi-media promotional schedule supplemented by extensive direct marketing and grass-roots campaigns and occasional print campaigns. Finally, we utilize in-store signage and creative product placement to help educate customers about services and products that fit their needs.

        We maintain a website located at www.pepboys.com. It serves as a portal to Pep Boys, allowing consumers the freedom and convenience to access more information about the company, our stores and our service, tires, parts and accessories offerings. Customers can purchase and schedule installation of tires with our TreadSmart application, schedule a service appointment with our eServe application, keep track of all their maintenance and service records electronically through our online Glovebox application and can now purchase products online from us for in-store or home delivery. A mobile version of our website was launched in 2012, providing increased convenience to our customers. We are committed to the continual improvement of our on-line presence as part of our strategy to grow where our target customers live, work and shop.

STORE OPERATIONS AND MANAGEMENT

        Most Pep Boys stores are open seven days a week. Most Supercenters have a Retail Manager and Service Manager (Service & Tire Centers only have a Service Manager, while Pep Express stores only have a Retail Manager) who report to geographic-specific Area Directors and Divisional Vice Presidents. The Divisional Vice Presidents report to either the Vice President—Supercenters, Eastern US and Service & Tire Centers or the Vice President—Supercenters, Western US who in turn report to the Senior Vice President—Store Operations who in turn reports to the President & Chief Executive Officer. As of February 2, 2013, a Retail Manager's and a Service Manager's average length of service with Pep Boys is approximately 10.3 and 7.1 years, respectively.

        Supervision and control over individual stores is facilitated by Area Directors and Divisional Vice Presidents making regular visits to stores and utilizing the Company's computer system and operational handbooks. All of our advertising, accounting, purchasing, information technology and most of administrative functions are conducted at our corporate headquarters in Philadelphia, Pennsylvania. Certain administrative functions for our regional operations are performed at various regional offices. See "Item 2 Properties."

INVENTORY CONTROL AND DISTRIBUTION

        Most of our merchandise is distributed to our stores from our warehouses by dedicated and contract carriers. Target levels of inventory for each product are established for each warehouse and store based upon prior shipment history, sales trends and seasonal demand. Inventory on hand is compared to the target levels on a weekly basis at each warehouse, potentially triggering re-ordering of merchandise from suppliers. In addition, each Pep Boys store has an automated inventory replenishment system that orders additional inventory, generally from a warehouse, when a store's inventory on-hand falls below the target level. We also consolidated certain of our slow-moving hard parts inventory that had previously been stocked at each of our five warehouses into our centrally-located Indianapolis warehouse that can service each of our stores with overnight delivery of these parts, when necessary.

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        Implementation of the Superhub concept enables local expansion of our auto parts product assortment in a cost effective manner. We are now able to satisfy customer needs for slow-moving auto parts by carrying limited amounts of this product at Superhub locations. These Superhubs then deliver this product to requesting Supercenters to fulfill customer demand. Superhubs are generally replenished from distribution centers multiple times per week. As of February 2, 2013, we operated 45 Superhubs within existing Supercenters, with plans to convert an additional 15 Superhubs in fiscal 2013. These Superhubs, including our additional conversions in 2013, will provide approximately 500 of our stores with an expanded auto parts assortment.

SUPPLIERS

        During fiscal 2012, our ten largest suppliers accounted for approximately 51% of the merchandise purchased. Only one of our suppliers accounted for more than 10% of our purchases. We have one long-term contract under which we are required to purchase merchandise. We believe that the relationships that we have established with our suppliers are generally good.

        In the past, we have not experienced difficulty in obtaining satisfactory sources of supply and we believe that adequate alternative sources of supply exist, at similar cost, for the types of merchandise sold in our stores.

COMPETITION

        We operate in a highly competitive environment. We encounter competition from national and regional chains, automotive dealerships and from local independent service providers and merchants. Our competitors include general, full range, discount department stores which carry automotive parts and accessories and/or have automotive service centers, as well as specialized automotive retailers. Generally, the specialized automotive retailers focus on either DIFM or DIY. We believe that our operation in both DIFM and DIY positively differentiates us from most of our competitors. However, certain competitors are larger in terms of sales volume and/or number of stores. Therefore, these competitors have access to greater capital and management resources and have been operating longer or have more stores in particular geographic areas. The principal methods of competition in our industry include store location, customer service, product offerings, quality and price.

REGULATION

        We are subject to various federal, state and local laws and governmental regulations relating to the operation of our business, including those governing the handling, storage and disposal of hazardous substances contained in the products that we sell and use in our service bays, the recycling of batteries, tires and used lubricants, the sale of small engine merchandise and the ownership and operation of real property.

EMPLOYEES

        At February 2, 2013, the Company employed 19,441 persons as follows:

Description
  Full-time   %   Part-time   %   Total   %  

Retail

    3,947     28.4     3,488     62.8     7,435     38.2  

Service center

    8,599     61.9     1,954     35.2     10,553     54.3  
                           

Store total

    12,546     90.3     5,442     98.0     17,988     92.5  

Warehouses

    525     3.8     107     1.9     632     3.3  

Offices

    815     5.9     6     0.1     821     4.2  
                           

Total employees

    13,886     100.0     5,555     100.0     19,441     100.0  
                           

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        We had no union employees as of February 2, 2013. At January 28, 2012, we employed 13,445 full-time and 5,678 part-time employees.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

        Certain statements contained herein, including in "Item 1 Business" and "Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations", constitute "forward-looking statements" within the meaning of The Private Securities Litigation Reform Act of 1995. The words "guidance," "expects," "anticipates," "estimates," "targets," "forecasts" and similar expressions are intended to identify these forward-looking statements. 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. Although we believe that the expectations reflected in these forward-looking statements are based on reasonable assumptions, we can give no assurance that our expectations will be achieved. Our actual results may differ materially from the results discussed in the forward-looking statements due to factors beyond our control, including the strength of the national and regional economies, retail and commercial consumers' ability to spend, the health of the various sectors of the automotive aftermarket, the weather in geographical regions with a high concentration of our stores, competitive pricing, the location and number of competitors' stores, product and labor costs and the additional factors described in our filings with the Securities and Exchange Commission ("SEC"). See "Item 1A Risk Factors." We assume no obligation to update or supplement forward-looking statements that become untrue because of subsequent events.

SEC REPORTING

        We electronically file certain documents with, or furnish such documents to, the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, along with any related amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. From time-to-time, we may also file registration and related statements pertaining to equity or debt offerings. The SEC maintains an Internet website at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file or furnish documents electronically with the SEC. All our filings can be accessed through the Securities and Exchange Commission website at www.sec.gov and searching with our ticker symbol "PBY".

        We provide free electronic access to our annual, quarterly and current reports (and all amendments to these reports) on our Internet website, www.pepboys.com, under the Investor Relations/Financial Information/SEC Filings link. These reports are available on our website as soon as reasonably practicable after we electronically file or furnish such materials with or to the SEC. Information on our website does not constitute part of this Annual Report, and any references to our website herein are intended as inactive textual references only.

        Copies of our SEC reports are also available free of charge. Please call our investor relations department at 215-430-9105 or write Pep Boys, Investor Relations, 3111 West Allegheny Avenue, Philadelphia, PA 19132 to request copies.

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EXECUTIVE OFFICERS OF THE COMPANY

        The following table indicates the name, age, tenure with the Company and position (together with the year of election to such position) of the executive officers of the Company:

Name
  Age   Tenure
with
Company
as of
April 2013
  Position with the Company and Date of Election to Position

Michael R. Odell

    49   6 years   President & Chief Executive Officer since June 2010

David R. Stern

    46   7 months   Executive Vice President—Chief Financial Officer since September 2012

Scott A. Webb

    49   6 years   Executive Vice President—Merchandising, Supply Chain & Digital Operations since August 2012

Christopher J. Adams

    45   1 month   Senior Vice President—Store Operations since March 2013

Thomas J. Carey

    55   8 months   Senior Vice President—Chief Customer Officer since August 2012

Joseph A. Cirelli

    54   36 years   Senior Vice President—Business Development since November 2007

Troy E. Fee

    44   6 years   Senior Vice President—Human Resources since July 2007

Brian D. Zuckerman

    43   14 years   Senior Vice President—General Counsel & Secretary since March 2009

        Michael R. Odell was named Chief Executive Officer on September 22, 2008, after serving as Interim Chief Executive Officer since April 23, 2008. Mr. Odell received the additional title of President on June 17, 2010. Mr. Odell joined Pep Boys in September 2007 as Executive Vice President—Chief Operating Officer, after having most recently served as the Executive Vice President and General Manager of Sears Retail & Specialty Stores. Mr. Odell joined Sears in its finance department in 1994 where he served until he joined Sears operations team in 1998. There he served in various executive operations positions of increasing seniority, including as Vice President, Stores—Sears Automotive Group.

        David R. Stern joined Pep Boys in September 2012 after having most recently served as Executive Vice President, Chief Administrative Officer and Chief Financial Officer of A.C. Moore Arts and Crafts. From 2007 until 2009, Mr. Stern held roles at Coldwater Creek, including Vice President, Financial Planning and Analysis and Corporate Controller. From 2000 to 2007, Mr. Stern was the Chief Financial Officer of Petro Services. Mr. Stern began his career as an internal auditor and gained experience as a financial analyst, accounting manager and corporate controller at several companies, including Delhaize America, before joining Petro Services.

        Scott A. Webb changed responsibilities in August 2012 when he was named Executive Vice President—Merchandising, Supply Chain and Digital Operations. Mr. Webb had previously served as Executive Vice President—Merchandising & Marketing since June 2010 after having joined Pep Boys in September 2007 as Senior Vice President—Merchandising & Marketing. Prior to joining Pep Boys, Mr. Webb served as the Vice President, Merchandising and Customer Satisfaction of AutoZone. Mr. Webb joined AutoZone in 1986 where he began his service in field management before transitioning, in 1992, to the Merchandising function.

        Christopher J. Adams joined Pep Boys in March 2013 after having most recently served as Chief Operating Officer of CarGroup Holdings LLC d/b/a webuyanycar.com since November 2010. From July 2008 to September 2010, Mr. Adams served as Chief Operating Officer of The BabyPlus Company, a manufacturer and distributor of a prenatal education system. From November 2006 to July 2008, Mr. Adams served as Chief Operating Officer of Holland Partners, a developer and manager of

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multifamily communities. Mr. Adams began his career at Enterprise Rent-A-Car in September 1989 where through July 2006 he progressed from a management trainee to become one of the executives selected to open up and lead Enterprise's U.K. operations.

        Thomas J. Carey joined Pep Boys in August 2012 after having most recently served as Senior Vice President and Chief Marketing Officer for Orchard Supply Hardware Stores. From March 2003 to June 2007, Mr. Carey served as Senior Vice President, Chief Marketing Officer, of West Marine, Inc. Prior to joining West Marine, Mr. Carey served in various marketing leadership positions of increasing seniority with several national retailers, including Sunglass Hut, Bloomingdale's and Builders Square. Mr. Carey also has agency experience with, among others, Ogilvy & Mather and Young & Rubicam.

        Joseph A. Cirelli was named Senior Vice President—Corporate Development in November 2007. Since March 1977, Mr. Cirelli has served the Company in positions of increasing seniority, including Senior Vice President—Service, Vice President—Real Estate and Development, Vice President—Operations Administration, and Vice President—Customer Satisfaction.

        Troy E. Fee, Senior Vice President—Human Resources, joined the Company in July 2007, after having most recently served as the Senior Vice President of Human Resources Shared Services for TBC Corporation, then the parent company of Big O Tires, Tire Kingdom and National Tire & Battery. Mr. Fee has over 20 years experience in operations and human resources in the tire and automotive service and repair business.

        Brian D. Zuckerman was named Senior Vice President—General Counsel & Secretary on March 1, 2009 after having most recently served as Vice President—General Counsel & Secretary since 2003. Mr. Zuckerman joined the Company as a staff attorney in 1999. Prior to joining Pep Boys, Mr. Zuckerman practiced corporate and securities law with two firms in Philadelphia.

        Each of the executive officers serves at the pleasure of the Board of Directors of the Company.

ITEM 1A    RISK FACTORS

        The following section discloses all known material risks that we face. However, it does not include risks that may arise in the future that are yet unknown nor existing risks that we do not judge material to the presentation of our financial statements. If any of the events or circumstances described as risk below actually occurs, our business, results of operations and/or financial condition could be materially and adversely affected.

Risks Related to Pep Boys

         We may not be able to successfully implement our business strategy, which could adversely affect our business, financial condition, results of operations and cash flows.

        Our long-term strategic plan, which we update annually, includes numerous initiatives to increase sales, enhance our margins and increase our return on invested capital in order to increase our earnings and cash flow. If these initiatives are unsuccessful, or if we are unable to implement the initiatives efficiently and effectively, our business, financial condition, results of operations and cash flows could be adversely affected.

        Successful implementation of our business strategy also depends on factors specific to the automotive aftermarket industry, many of which may be beyond our control (see "Risks Related to Our Industry").

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         If we are unable to generate sufficient cash flows from our operations, our liquidity will suffer and we may be unable to satisfy our obligations.

        We require significant capital to fund our business. While we believe we have the ability to sufficiently fund our planned operations and capital expenditures for the next fiscal year, circumstances could arise that would materially affect our liquidity. For example, cash flows from our operations could be affected by changes in consumer spending habits or the failure to maintain favorable vendor payment terms or our inability to successfully implement sales growth initiatives. We may be unsuccessful in securing alternative financing when needed, on terms that we consider acceptable, or at all.

        The degree to which we are leveraged could have important consequences to investments in our securities, including the following risks:

    our ability to obtain additional financing for working capital, capital expenditures, acquisitions or general corporate purposes may be impaired in the future;

    a substantial portion of our cash flow from operations must be dedicated to the payment of rent and the principal and interest on our debt, thereby reducing the funds available for other purposes;

    our failure to comply with financial and operating restrictions placed on us and our subsidiaries by our credit facilities could result in an event of default that, if not cured or waived, could have a material adverse effect on our business or our prospects; and

    if we are substantially more leveraged than some of our competitors, we might be at a competitive disadvantage to those competitors that have lower debt service obligations and significantly greater operating and financial flexibility than we do.

         We depend on our relationships with our vendors and a disruption of these relationships or of our vendors' operations could have a material adverse effect on our business and results of operations.

        Our business depends on developing and maintaining productive relationships with our vendors. Many factors outside our control may harm these relationships. For example, financial difficulties that some of our vendors may face may increase the cost of the products we purchase from them or may interrupt our source of supply. In addition, our failure to promptly pay, or order sufficient quantities of inventory from our vendors may increase the cost of products we purchase or may lead to vendors refusing to sell products to us at all.

        A disruption of our vendor relationships or a disruption in our vendors' operations could have a material adverse effect on our business and results of operations.

         We depend on our senior management team and our other personnel, and we face substantial competition for qualified personnel.

        Our success depends in part on the efforts of our senior management team. Our continued success will also depend upon our ability to retain existing, and attract additional, qualified field personnel to meet our needs. We face substantial competition, both from within and outside of the automotive aftermarket to retain and attract qualified personnel. In addition, we believe that the number of qualified automotive service technicians in the industry is generally insufficient to meet demand.

         We are subject to environmental laws and may be subject to environmental liabilities that could have a material adverse effect on us in the future.

        We are subject to various federal, state and local environmental laws and governmental regulations relating to the operation of our business, including those governing the handling, storage and disposal

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of hazardous substances contained in the products we sell and use in our service bays, the recycling of batteries, tires and used lubricants, the ownership and operation of real property and the sale of small engine merchandise. When we acquire or dispose of real property or enter into financings secured by real property, we undertake investigations that may reveal soil and/or groundwater contamination at the subject real property. All such known contamination has either been remediated, or is in the process of being remediated. Any costs expected to be incurred related to such contamination are either covered by insurance or financial reserves provided for in the consolidated financial statements. However, there exists the possibility of additional soil and/or groundwater contamination on our real property where we have not undertaken an investigation. A failure by us to comply with environmental laws and regulations could have a material adverse effect on us.

Risks Related to Our Industry

         Our industry is highly competitive, and price competition in some segments of the automotive aftermarket or a loss of trust in our participation in the "do-it-for-me" market, could cause a material decline in our revenues and earnings.

        The automotive aftermarket retail and service industry is highly competitive and subjects us to a wide variety of competitors. We compete primarily with the following types of businesses in each segment of the automotive aftermarket:

Retail

    Do-It-Yourself

    automotive parts and accessories stores;

    automobile dealers that supply manufacturer replacement parts and accessories; and

    mass merchandisers and wholesale clubs that sell automotive products and select non-automotive merchandise that appeals to automotive "Do-It-Yourself" customers, such as generators, power tools and canopies.

    online retailers

    Commercial

    mass merchandisers, wholesalers and jobbers (some of which are associated with national parts distributors or associations).

Service

    Do-It-For-Me

    regional and local full service automotive repair shops;

    automobile dealers that provide repair and maintenance services;

    national and regional (including franchised) tire retailers that provide additional automotive repair and maintenance services; and

    national and regional (including franchised) specialized automotive (such as oil change, brake and transmission) repair facilities that provide additional automotive repair and maintenance services.

    Tires

    national and regional (including franchised) tire retailers; and

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    mass merchandisers and wholesale clubs that sell tires.

        A number of our competitors have more financial resources, are more geographically diverse, have a higher geographic market concentration or have better name recognition than we do, which might place us at a competitive disadvantage to those competitors. Because we seek to offer competitive prices, if our competitors reduce their prices we may also be forced to reduce our prices, which could cause a material decline in our revenues and earnings.

        With respect to the service labor category, the majority of consumers are unfamiliar with their vehicle's mechanical operation and, as a result, often select a service provider based on trust. Potential occurrences of negative publicity associated with the Pep Boys brand, the products we sell or installation or repairs performed in our service bays, whether or not factually accurate, could cause consumers to lose confidence in our products and services in the short or long term, and cause them to choose our competitors for their automotive service needs.

         Vehicle miles driven may decrease, resulting in a decline of our revenues and negatively affecting our results of operations.

        Our industry is significantly influenced by the number of vehicle miles driven. Factors that may cause the number of vehicle miles and our revenues and our results of operations to decrease include:

    the weather—as vehicle maintenance may be deferred during periods of inclement weather;

    the economy—as during periods of poor economic conditions, customers may defer vehicle maintenance or repair, and during periods of good economic conditions, consumers may opt to purchase new vehicles rather than service the vehicles they currently own and replace worn or damaged parts;

    gas prices—as increases in gas prices may deter consumers from using their vehicles; and

    travel patterns—as changes in travel patterns may cause consumers to rely more heavily on mass transportation.

         Economic factors affecting consumer spending habits may continue, resulting in a decline in revenues and may negatively impact our business.

        Many economic and other factors outside our control, including consumer confidence, consumer spending levels, employment levels, consumer debt levels and inflation, as well as the availability of consumer credit, affect consumer spending habits. A significant deterioration in the global financial markets and economic environment, recessions or an uncertain economic outlook could adversely affect consumer spending habits and result in lower levels of economic activity. The domestic and international political situation also affects consumer confidence. Any of these events and factors could cause consumers to curtail spending, especially with respect to our more discretionary merchandise offerings, such as automotive accessories, tools and personal transportation products.

        During fiscal 2009, there was significant deterioration in the global financial markets and economic environment, which negatively impacted consumer spending and our revenues. While the economic climate improved somewhat in fiscal 2012, consumer spending has not returned to pre-recession levels. If the economy does not continue to strengthen, or if our efforts to counteract the impacts of these trends are not sufficiently effective, our revenues could decline, negatively affecting our results of operations.

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         Consolidation among our competitors may negatively impact our business.

        Our industry has experienced consolidation over time. If this trend continues or if our competitors are able to achieve efficiencies in their mergers, the Company may face greater competitive pressures in the markets in which we operate.

         Healthcare reform legislation could have a negative impact on our business, financial condition and results of operations.

        The Patient Protection and Affordable Care Act is expected to increase our employee health care costs. While the significant costs of the legislation enacted will occur after 2013 due to provisions of the legislation being phased in over time, changes to our health care costs structure could adversely affect our results of operations.

ITEM 1B    UNRESOLVED STAFF COMMENTS

        None.

ITEM 2    PROPERTIES

        The Company owns its five-story, approximately 300,000 square foot corporate headquarters in Philadelphia, Pennsylvania. During fiscal 2012, the Company sold a 60,000 square foot office building in Los Angeles, California. The Company also owns the following administrative regional offices—approximately 4,000 square feet of space in each of Melrose Park, Illinois and Bayamon, Puerto Rico. The Company leases an administrative regional office of approximately 3,500 square feet in Los Angeles, California.

        Of the 758 store locations operated by the Company at February 2, 2013, 232 are owned and 526 are leased. As of February 2, 2013, 142 of the 232 stores owned by the Company are currently used as collateral under our Senior Secured Term Loan, due October 2018.

        The following table sets forth certain information regarding the owned and leased warehouse space utilized by the Company to replenish its store locations at February 2, 2013:

Warehouse Locations
  Products
Warehoused
  Approximate
Square
Footage
  Owned
or
Leased
  Stores
Serviced
  States Serviced

San Bernardino, CA

  All     600,000   Leased     181   AZ, CA, NV, UT, WA

McDonough, GA

  All     392,000   Owned     234   AL, FL, GA, LA, NC, PR, SC, TN

Mesquite, TX

  All     244,000   Owned     79   AR, CO, LA, MO, NM, OK, TX

Plainfield, IN

  All     403,000   Owned     77   IL, IN, KY, MI, MN, OH, PA

Chester, NY

  All     402,000   Owned     188   CT, DE, MA, MD, ME, NH, NJ, NY, PA, RI, VA

Philadelphia, PA

  Tires & Batteries     74,000   Leased     63   DE, NJ, PA, VA, MD
                       

Total

        2,115,000              
                       

        The Company anticipates that its existing and future warehouse space and its access to outside storage will accommodate inventory necessary to support future store expansion and any increase in SKUs through the end of fiscal 2013.

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ITEM 3    LEGAL PROCEEDINGS

        The Company is party to various actions and claims arising in the normal course of business. The Company believes that amounts accrued for awards or assessments in connection with all such matters are adequate and that the ultimate resolution of these matters will not have a material adverse effect on the Company's financial position. However, there exists a possibility of loss in excess of the amounts accrued, the amount of which cannot currently be estimated. While the Company does not believe that the amount of such excess loss will be material to the Company's financial position, any such loss could have a material adverse effect on the Company's results of operations in the period(s) during which the underlying matters are resolved.

ITEM 4    MINE SAFETY DISCLOSURES

        Not applicable.


PART II

ITEM 5    MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

        The common stock of The Pep Boys—Manny, Moe & Jack is listed on the New York Stock Exchange under the symbol "PBY." There were 4,173 registered shareholders as of March 30, 2013. The following table sets forth for the periods listed, the high and low sale prices and the cash dividends paid on the Company's common stock.

MARKET PRICE PER SHARE

 
  Market Price Per
Share
   
 
 
  Cash Dividends
Per Share
 
 
  High   Low  

Fiscal 2012

                   

Fourth quarter

  $ 11.16   $ 9.48   $  

Third quarter

    10.57     8.76      

Second quarter

    14.93     8.67      

First quarter

    15.46     14.90      

Fiscal 2011

                   

Fourth quarter

  $ 12.08   $ 10.21   $ 0.03  

Third quarter

    12.04     8.18     0.03  

Second quarter

    14.28     10.27     0.03  

First quarter

    14.70     10.53     0.03  

        On January 29, 2012, the Board of Directors suspended all future cash dividend payments. On December 12, 2012, the Board of Directors of the Company authorized a program to repurchase up to $50.0 million of the Company's common stock. The program is effective immediately and has no expiration date. During the fourth quarter of fiscal 2012, the Company repurchased 35,000 shares of Common Stock for $342,000. All of these repurchased shares were placed into the Company's treasury. A portion of the treasury shares will be used by the Company to provide benefits to employees under its compensation plans.

EQUITY COMPENSATION PLANS

        The following table sets forth the Company's shares authorized for issuance under its equity compensation plans at February 2, 2013:

 
  Number of
securities to be
issued upon
exercise of
outstanding
options,
warrants and
rights (a)
  Weighted
average
exercise price
of outstanding
options,
warrants and
rights (b)
  Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in the first
column (a))
 

Equity compensation plans approved by security holders

    2,751,725   $ 5.10     2,901,018  

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STOCK PRICE PERFORMANCE

        The following graph compares the cumulative total return on shares of Pep Boys stock over the past five years with the cumulative total return on shares of companies in (1) the Standard & Poor's SmallCap 600 Index, (2) the S&P 600 Automotive Retail Index and (3) an index of peer and comparable companies as determined by the Company. The comparison assumes that $100 was invested in January 2008 in Pep Boys Stock and in each of the indices and assumes reinvestment of dividends. The S&P 600 Automotive Retail Index consists of companies in the S&P SmallCap 600 index that meet the definition of the automotive retail classification, and is currently comprised of: Group 1 Automotive, Inc.; Lithia Motors, Inc.; Monro Muffler Brake, Inc.; Sonic Automotive, Inc.; and The Pep Boys—Manny, Moe & Jack. The companies currently comprising the Peer Group are: Aaron's, Inc.; Advance Auto Parts, Inc.; AutoZone, Inc.; Big 5 Sporting Goods Corp.; Cabelas, Inc.; Conn's, Inc.; Dick's Sporting Goods, Inc.; HHGregg, Inc.; Midas, Inc. (included through FYE 2012); Monro Muffler Brake, Inc.; O'Reilly Automotive, Inc.; PetSmart, Inc.; RadioShack Corp.; Rent-A-Center, Inc.; Tractor Supply Co.; West Marine, Inc.


Comparison of Cumulative Five Year Total Return

GRAPHIC

Company/Index
  Jan. 2008   Jan. 2009   Jan. 2010   Jan. 2011   Jan. 2012   Jan. 2013  

Pep Boys

  $ 100.00     25.97     76.15     128.94     112.58     102.61  

S&P SmallCap 600 Index

  $ 100.00     61.72     85.77     111.55     121.45     140.91  

Peer Group

  $ 100.00     84.75     115.09     172.22     226.38     259.22  

S&P 600 Automotive Retail Index

  $ 100.00     27.39     75.91     108.48     138.70     167.89  

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ITEM 6    SELECTED FINANCIAL DATA

        The following tables set forth the selected financial data for the Company and should be read in conjunction with the Consolidated Financial Statements and Notes thereto included elsewhere herein.

Fiscal Year Ended
  Feb. 2, 2013
(53 weeks)
  Jan. 28, 2012
(52 weeks)
  Jan. 29, 2011
(52 weeks)
  Jan. 30, 2010
(52 weeks)
  Jan. 31, 2009
(52 weeks)
 
 
  (dollar amounts are in thousands, except per share data)
 

STATEMENT OF OPERATIONS DATA

                               

Merchandise sales

  $ 1,643,948   $ 1,642,757   $ 1,598,168   $ 1,533,619   $ 1,569,664  

Service revenue

    446,782     420,870     390,473     377,319     358,124  

Total revenues

    2,090,730     2,063,627     1,988,641     1,910,938     1,927,788  

Costs of merchandise sales

    1,159,994     1,154,322     1,110,380     1,084,804     1,129,162  

Cost of service revenue

    439,236     399,776     355,909     340,027     333,194  

Gross profit from merchandise sales(10)

    483,954 (2)   488,435 (4)   487,788 (6)   448,815 (7)   440,502 (8)

Gross profit from service revenue(10)

    7,546 (2)   21,094 (4)   34,564 (6)   37,292 (7)   24,930 (8)

Total gross profit

    491,500 (2)   509,529 (4)   522,352 (6)   486,107 (7)   465,432 (8)

Selling, general and administrative expenses

    463,416     443,986     442,239     430,261     485,044  

Pension settlement expense

    17,753                  

Net gain from disposition of assets

    1,323     27     2,467     1,213     9,716  

Operating profit (loss)

    11,654     65,570     82,580     57,059     (9,896 )

Merger termination fees, net

    42,816 (1)                

Non-operating income

    2,012     2,324     2,609     2,261     1,967  

Interest expense

    33,982 (3)   26,306     26,745     21,704 (9)   27,048 (9)

Earnings (loss) from continuing operations before income taxes and discontinued operations

    22,500     41,588     58,444     37,616     (34,977 )

Income tax expense (benefit)

    9,345     12,460 (5)   21,273 (5)   13,503     (6,139 )

Earnings (loss) from continuing operations before discontinued operations

    13,155     29,128     37,171     24,113     (28,838 )

Discontinued operations, net of tax

    (345 )   (225 )   (540 )   (1,077) (7)   (1,591) (8)

Net earnings (loss)

    12,810     28,903     36,631     23,036     (30,429 )

BALANCE SHEET DATA

                               

Working capital

  $ 126,505   $ 166,627   $ 203,367   $ 205,525   $ 179,233  

Current ratio

    1.18 to 1     1.27 to 1     1.36 to 1     1.40 to 1     1.33 to 1  

Merchandise inventories

  $ 641,208   $ 614,136   $ 564,402   $ 559,118   $ 564,931  

Property and equipment-net

  $ 657,270   $ 696,339   $ 700,981   $ 706,450   $ 740,331  

Total assets

  $ 1,603,949   $ 1,633,779   $ 1,556,672   $ 1,499,086   $ 1,552,389  

Long-term debt, excluding current maturities

  $ 198,000   $ 294,043   $ 295,122   $ 306,201   $ 352,382  

Total stockholders' equity

  $ 537,572   $ 504,329   $ 478,460   $ 443,295   $ 423,156  

DATA PER COMMON SHARE

                               

Basic earnings (loss) from continuing operations before discontinued operations

  $ 0.25   $ 0.55   $ 0.71   $ 0.46   $ (0.55 )

Basic earnings (loss)

    0.24     0.54     0.70     0.44     (0.58 )

Diluted earnings (loss) from continuing operations before discontinued operations

    0.24     0.54     0.70     0.46     (0.55 )

Diluted earnings (loss)

    0.24     0.54     0.69     0.44     (0.58 )

Cash dividends declared

        0.12     0.12     0.12     0.27  

Book value

    10.12     9.56     9.10     8.46     8.10  

Common share price range:

                               

High

    15.46     14.70     15.96     10.83     12.56  

Low

    8.67     8.18     7.86     2.76     2.62  

OTHER STATISTICS

                               

Return on average stockholders' equity(11)

    2.4 %   5.8 %   7.9 %   5.3 %   (6.8 )%

Common shares issued and outstanding

    53,125,743     52,753,719     52,585,131     52,392,967     52,237,750  

Capital expenditures

  $ 54,696   $ 74,746   $ 70,252   $ 43,214   $ 151,883 (12)

Number of stores

    758     738     621     587     562  

Number of service bays

    7,303     7,182     6,259     6,027     5,845  

(1)
In fiscal 2012, we recorded settlement proceeds, net of merger related costs of $42.8 million, resulting from the termination of the "go private" transaction.

(2)
Includes an aggregate pretax charge of $10.6 million for asset impairment, of which $5.1 million was charged to merchandise cost of sales, $5.5 million was charged to service cost of sales.

(3)
Includes $11.2 million of fees associated with debt refinancing.

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(4)
Includes an aggregate pretax charge of $1.6 million for asset impairment, of which $0.6 million was charged to merchandise cost of sales, $1.0 million was charged to service cost of sales.

(5)
Includes a tax benefit of $3.6 million and $2.2 million in Fiscal 2011 and Fiscal 2010, respectively, due to the release of valuation allowances on state net operating loss carryforwards and credits.

(6)
Includes a pretax benefit of $5.9 million due to the reduction in reserve for excess inventory which reduced merchandise cost of sales and an aggregate pretax charge of $1.0 million for asset impairment, of which $0.8 million was charged to merchandise cost of sales and $0.2 million was charged to service cost of sales.

(7)
Includes an aggregate pretax charge of $3.1 million for asset impairment, of which $2.2 million was charged to merchandise cost of sales, $0.7 million was charged to service cost of sales and $0.2 million (pretax) was charged to discontinued operations.

(8)
Includes an aggregate pretax charge of $5.4 million for asset impairment, of which $2.8 million was charged to merchandise cost of sales, $0.6 million was charged to service cost of sales and $1.9 million (pretax) was charged to discontinued operations.

(9)
Fiscal 2009 includes a gain from debt retirement of $6.2 million. Fiscal 2008 includes a gain from debt retirement of $3.5 million, partially offset by a $1.2 million charge for deferred financing costs.

(10)
Gross profit from merchandise sales includes the cost of products sold, buying, warehousing and store occupancy costs. Gross profit from service revenue includes the cost of installed products sold, buying, warehousing, service payroll and related employee benefits and occupancy costs. Occupancy costs include utilities, rents, real estate and property taxes, repairs and maintenance and depreciation and amortization expenses. Our gross profit may not be comparable to those of our competitors due to differences in industry practice regarding the classification of certain costs.

(11)
Return on average stockholders' equity is calculated by taking the net earnings (loss) for the period divided by average stockholders' equity for the year.

(12)
Includes the purchase of master lease assets for $117.1 million.

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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  
Year ended
  Feb 2, 2013
(Fiscal 2012)
  Jan 28, 2012
(Fiscal 2011)
  Jan 29, 2011
(Fiscal 2010)
  Fiscal 2012 vs.
Fiscal 2011
  Fiscal 2011 vs.
Fiscal 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 based adjustment in the prior year, higher travel costs from increased gasoline prices related to our commercial fleet of $2.3 million, and acquisition, transition and merger related costs of $2.0 million. These were mostly offset by lower payroll and related expenses of $4.9 million, primarily due to lower short-term compensation accruals, and lower media expense of $2.6 million. The reduction as a percentage of sales reflects improved leverage of selling, general and administrative expenses achieved through increased sales in fiscal 2011.

        Net gains from the disposition of assets were not significant in fiscal 2011 and were $2.5 million in fiscal 2010. Fiscal 2010 includes $2.1 million in net settlement proceeds from the disposition of a previously closed property.

        Interest expense decreased by $0.4 million to $26.3 million in fiscal 2011 compared to $26.7 million in fiscal 2010.

        Income tax expense for fiscal 2011 was $12.5 million, or an effective rate of 30.0%, as compared to $21.3 million, or an effective rate of 36.4%, for fiscal 2010. The fiscal 2011 effective tax rate includes a $3.6 million benefit related to the release of valuation allowance on certain state net operating losses

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and credits. The fiscal 2010 effective tax rate includes a $2.2 million benefit related to the reduction of a valuation allowance on certain state net operating losses and credits.

        As a result of the foregoing, we reported net earnings of $28.9 million for fiscal 2011, a decrease of $7.7 million, or 21.1%, as compared to net earnings of $36.6 million for fiscal 2010. Our diluted earnings per share were $0.54 for fiscal 2011 as compared to $0.69 for fiscal 2010.

Discontinued Operations

        The analysis of our results of continuing operations excludes the operating results of closed stores, where the customer base could not be maintained, which have been classified as discontinued operations for all periods presented.

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 positively differentiates us from most of our competitors. Although we manage our performance at a store level in aggregation, we believe that the following presentation, which includes the reclassification of revenue from merchandise that we install in customer vehicles 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 the business.

 
  Fiscal Year ended  
(dollar amounts in thousands)
  February 2,
2013
  January 28,
2012
  January 29,
2011
 

Service center revenue(1)

  $ 1,095,284   $ 1,038,714   $ 941,869  

Retail sales(2)

    995,446     1,024,913     1,046,772  
               

Total revenues

  $ 2,090,730   $ 2,063,627   $ 1,988,641  
               

Gross profit from service center revenue(3)

  $ 208,795   $ 220,314   $ 216,176  

Gross profit from retail sales(4)

    282,705     289,213     306,176  
               

Total gross profit

  $ 491,500   $ 509,527   $ 522,352  
               

(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, buying, 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.

(4)
Gross profit from retail sales includes the cost of products sold, buying, warehousing and store occupancy costs. Occupancy costs include utilities, rents, real estate and property taxes, repairs and maintenance and depreciation and amortization expenses.

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CAPITAL & LIQUIDITY

Capital Resources and Needs

        Our cash requirements arise principally from (i) the purchase of inventory and capital expenditures related to existing and new stores, offices and distribution centers, (ii) debt service and (iii) contractual obligations. Cash flows realized through the sale of automotive services, tires, parts and accessories are our primary source of liquidity. Net cash provided by operating activities was $88.5 million in fiscal 2012, as compared to $73.7 million in the prior year period. The $14.8 million increase was due to a favorable change in operating assets and liabilities of $28.4 million partially offset by a decrease in net earnings, net of non-cash adjustments of $13.4 million. The change in operating assets and liabilities was primarily due to favorable changes in accrued expenses and other current assets of $30.7 million and other long-term liabilities of $6.0 million partially offset by an unfavorable change in inventory, net of accounts payable, of $8.2 million.

        The favorable change in accrued expenses and other current assets was primarily due to an increase in employee payroll tax accruals of $12.2 million due to the timing of payments to taxing authorities and a reduction in employer contributions under our savings, supplemental executive retirement and bonus plans of $9.6 million.

        In both fiscal 2012 and 2011, the increased investment in inventory of $27.1 and $42.8 million, respectively, was funded by improvements in our trade vendor payment terms. Taking into account the 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 $65.5 million and $53.8 million for fiscal 2012 and 2011, respectively. The ratio of accounts payable, including our trade payable program, to inventory was 61.5% at February 2, 2013 and 53.6% at January 28, 2012. The $27.1 million increase in inventory from January 28, 2012 was primarily due to an expanded inventory assortment in certain hard part categories, seasonal purchases and increased investment in our new stores.

        In the fourth quarter of fiscal 2012, we contributed $14.1 million to fully fund, on a termination basis, our previously frozen defined benefit pension plan.

        Cash used in investing activities was $52.8 million in fiscal 2012 as compared to $125.6 million in the prior year period. Capital expenditures were $54.7 million and $74.7 million in fiscal 2012 and 2011, respectively. Capital expenditures for fiscal 2012 included the addition of 20 Service & Tire Centers, six Supercenters, the conversion of seven Supercenters into Superhubs, the addition of 17 Speed Shops within existing Supercenters and information technology enhancements including our eCommerce initiatives and parts catalog enhancements. Capital expenditures for fiscal 2011 included the addition of 20 new Service & Tire Centers, the conversion of one Service & Tire Center and one Pep Express store to Supercenters, and the addition of one new Supercenter. In fiscal 2012 we sold our regional administrative office in Los Angeles, CA for approximately $5.6 million, net of closing costs. During fiscal 2011, we acquired 99 Service & Tire Centers through three separate transactions for $42.6 million, net of cash acquired. In addition, during fiscal 2012 and fiscal 2011 we invested $3.7 million and $7.6 million, respectively 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 2013 are $65.0 million. Our fiscal year 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.

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        In fiscal 2012, cash used in financing activities was $34.8 million, as compared to cash provided by financing activities of $20.0 million in the prior year period. During the third quarter of 2012, we increased the amount of our borrowing under our amended and restated Senior Secured Term Loan from $150.0 to $200.0 million and used those proceeds together with cash on hand to repay, in full, the $147.0 million principal amount then outstanding under our 7.5% Senior Subordinated Notes due 2014 and to settle our outstanding interest rate swap (see Note 5 to the Consolidated Financial Statements). As a result of the refinancing, we reduced our total debt by $95.1 million and extended its maturity to 2018. While this refinancing activity resulted in a one-time charge to interest expense of $11.2 million, it also reduced our annual interest expense by approximately $11.0 million.

        Our trade payable program, which has an availability of $175.0 million, 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. In fiscal 2012, we increased net borrowings on our trade payable program by $64.5 million to $149.7 million as of February 2, 2013 from $85.2 million as of January 28, 2012 (classified as trade payable program liability on the consolidated balance sheet).

        In fiscal 2011, we paid $2.4 million in financing costs to amend and restate our revolving credit agreement to reduce its interest rate by 75 basis points and to extend its maturity to July 2016 and paid a cash dividend of $6.3 million.

        In the fourth quarter of fiscal 2012, our Board of Directors authorized a program to repurchase up to $50.0 million of our common stock. During the fourth quarter of fiscal 2012, we used $0.3 million to repurchase shares under the program.

        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 February 2, 2013 we had undrawn availability on our revolving credit facility of $141.2 million. As of February 2, 2013 we had $59.2 million of cash and cash equivalents on hand.

        Our working capital was $126.5 million and $166.6 million at February 2, 2013 and January 28, 2012, respectively. Our total debt, net of cash on hand, as a percentage of our net capitalization, was 20.8% and 32.0% at February 2, 2013 and January 28, 2012, respectively.

    Contractual Obligations

        The following chart represents our total contractual obligations and commercial commitments as of February 2, 2013:

Contractual Obligations
  Total   Within 1 year   From
1 to 3 years
  From
3 to 5 years
  After 5 years  
 
  (dollars amounts in thousands)
 

Long-term debt(1)

  $ 200,000   $ 2,000   $ 4,000   $ 4,000   $ 190,000  

Operating leases

    791,723     102,609     189,296     159,742     340,076  

Expected scheduled interest payments on long-term debt

    59,533     10,675     21,048     20,645     7,165  

Other long-term obligations(2)

    13,915                  
                       

Total contractual obligations

  $ 1,065,171   $ 115,284   $ 214,344   $ 184,387   $ 537,241  
                       

(1)
Long-term debt includes current maturities.

(2)
Comprised of deferred compensation items of $6.1 million, income tax liabilities of $1.8 million and asset retirement obligations of $6.0 million. We made voluntary contributions of $3.0 million and $5.0 million to our defined benefit pension plan in fiscal 2011 and 2010, respectively. The

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    pension plan obligation was settled in December of 2012 with a $14.1 million contribution to fully fund the plan on a termination basis. See Note 13 of the Notes to Consolidated Financial Statements in "Item 8 Financial Statements and Supplementary Data" for further discussion of our pension plans. The above table does not reflect the timing of projected settlements for our recorded asset retirement obligation costs and income tax liabilities because we cannot make a reliable estimate of the timing of the related cash payments.


Commercial Commitments
  Total   Within 1 year   From
1 to 3 years
  From
3 to 5 years
  After 5 years  
 
  (dollar amounts in thousands)
 

Standby letters of credit

  $ 32,173   $ 32,173   $   $   $  

Surety bonds

    11,541     8,295     3,246          

Purchase obligations(1)(2)

    4,448     4,448              
                       

Total commercial commitments

  $ 48,162   $ 44,916   $ 3,246   $   $  
                       

(1)
Our open purchase orders are based on current inventory or operational needs and are fulfilled by our vendors within short periods of time. We currently do not have minimum purchase commitments under our vendor supply agreements (other than(2) below) and generally, our open purchase orders (orders that have not been shipped) are not binding agreements. Those purchase obligations that are in transit from our vendors at February 2, 2013 that we do not have legal title to are considered commercial commitments.

(2)
In fiscal 2011, we entered into a commercial commitment to purchase 4.2 million units of oil products at various prices over a two-year period. Based on our present consumption rate, we expect to meet the cumulative minimum purchase requirements under this contract by the end of fiscal 2013.

    Senior Secured Term Loan Facility due October 2018

        On October 11, 2012, we entered into the Second Amended and Restated Credit Agreement that (i) increased the size of our Senior Secured Term Loan (the "Term Loan") to $200.0 million, (ii) extended the maturity of the Term Loan from October 27, 2013 to October 11, 2018, (iii) reset the interest rate under the Term Loan to the London Interbank Offered Rate (LIBOR), subject to a floor of 1.25%, plus 3.75% and (iv) added an additional 16 of our owned locations to the collateral pool securing the Term Loan. The amended and restated Term Loan is deemed to be substantially different than the prior Term Loan, and therefore the modification of the debt has been treated as a debt extinguishment. As of February 2, 2013, 142 stores collateralized the Term Loan. We recorded $6.5 million of deferred financing costs related to the Second Amended and Restated Credit Agreement. The amount outstanding under the term loan as of February 2, 2013 was $200.0 million.

        Net proceeds from the amended and restated Term Loan together with cash on hand were used to settle the outstanding interest rate swap on the Term Loan as structured prior to its amendment and restatement and to satisfy and discharge all of our outstanding 7.5% Senior Subordinated Notes ("Notes") due 2014. The settlement of the interest rate swap resulted in the reclassification of $7.5 million of accumulated other comprehensive loss to interest expense. We recognized, in interest expense, $1.9 million of deferred financing costs related to the Notes and the Term Loan as structured prior to its amendment and restatement. The interest payment and the swap settlement payment are presented within cash flows from operations on the consolidated statement of cash flows.

    Revolving Credit Agreement, Through July 2016

        On January 16, 2009 we entered into a Revolving Credit Agreement (the "Agreement") with available borrowings up to $300.0 million and a maturity of January 2014. Total incurred fees of

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$6.8 million were capitalized and are being amortized over the original five year life of the facility. On July 26, 2011, we amended and restated the Agreement to reduce its interest rate by 75 basis points and to extend its maturity to July 2016. Our ability to borrow under the Agreement is based on a specific borrowing base consisting of inventory and accounts receivable. The interest rate on this credit line is daily LIBOR plus 2.00% to 2.50% based upon the then current availability under the Agreement. As of February 2, 2013, we had no borrowings outstanding under the Agreement and $37.4 million of availability was utilized to support outstanding letters of credit. Taking this into account, the borrowings under the vendor financing program, and the borrowing base requirements, as of February 2, 2013, there was $141.2 million of availability remaining under the Agreement.

    Other Matters

        Our debt agreements require compliance with covenants. The most restrictive of these covenants, an earnings before interest, taxes, depreciation and amortization ("EBITDA") requirement, is triggered if the availability under our Revolving Credit Agreement plus unrestricted cash drops below $50.0 million. As of February 2, 2013, we were in compliance with all financial covenants contained in its debt agreements.

    Other Contractual Obligations

        We have a vendor financing program which is funded by various bank participants who have the ability, but not the obligation, to purchase account receivables owed by us directly from our vendors. The total availability under the program was $175.0 million as of February 2, 2013. There was an outstanding balance of $149.7 million and $85.2 million under this program as of February 2, 2013 and January 28, 2012, respectively.

        We have letter of credit arrangements in connection with our risk management, import merchandising and vendor financing programs. We had $5.2 million of outstanding commercial letters of credit as of February 2, 2013. As of January 28, 2012, there were no outstanding commercial letters of credit. We were contingently liable for $32.2 million and $31.7 million in outstanding standby letters of credit as of February 2, 2013 and January 28, 2012, respectively.

        We are also contingently liable for surety bonds in the amount of approximately $11.5 million and $8.3 million as of February 2, 2013 and January 28, 2012, respectively. The surety bonds guarantee certain of our payments (for example utilities, easement repairs, licensing requirements and customs fees).

    Off-balance Sheet Arrangements

        We lease certain property and equipment under operating leases and lease financings which contain renewal and escalation clauses, step rent provisions, capital improvements funding and other lease concessions. These provisions are considered in the calculation of our minimum lease payments which are recognized as expense on a straight-line basis over the applicable lease term. Any lease payments that are based upon an existing index or rate are included in our minimum lease payment calculations. Total operating lease commitments as of February 2, 2013 were $791.7 million.

    Pension and Retirement Plans

        On December 31, 2008, we paid $14.4 million to terminate the defined benefit portion of our Supplemental Executive Retirement Plan (SERP) and recorded a $6.0 million settlement charge. We continue to maintain the non-qualified defined contribution portion of the SERP plan (the "Account Plan") for key employees designated by the Board of Directors. Our contribution expense for the Account Plan was $0.1 million, $0.3 million and $1.2 million for fiscal 2012, 2011 and 2010, respectively.

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        We have a qualified 401(k) savings plan and a separate savings plan for employees residing in Puerto Rico, which cover all full-time employees who are at least 21 years of age with one or more years of service. We contribute the lesser of 50% of the first 6% of a participant's contributions or 3% of the participant's compensation. For fiscal 2012, 2011 and 2010, our contributions were conditional upon the achievement of certain pre-established financial performance goals which were met in fiscal 2010, but not in fiscal 2012 or 2011. Our savings plans' contribution expense was $3.0 million in fiscal 2010.

        We also had a defined benefit pension plan (the "Plan") covering full-time employees hired on or before February 1, 1992. As of December 31, 1996, we froze the accrued benefits under the Plan and active participants became fully vested. During the third quarter of fiscal 2011, we began the process of terminating the Plan which was completed in December 2012. In accordance with Internal Revenue Service and Pension Benefit Guaranty Corporation requirements, we contributed $14.1 million to fully fund the Plan on a termination basis. Plan participants were not adversely affected by the Plan termination. The participants' benefits were converted into a lump sum cash payment or an annuity contract placed with an insurance carrier.

        The expense under these plans for fiscal 2012, 2011 and 2010 was $19.3 million, $1.4 million and $6.3 million, respectively. See Note 13 of the Notes to Consolidated Financial Statements in "Item 8 Financial Statements and Supplementary Data" for further discussion of our pension plans.

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, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the 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, 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.

        We believe that the following represent our more critical estimates and assumptions used in the preparation of the consolidated financial statements:

    Inventory is stated at lower of cost, as determined under the last-in, first-out (LIFO) method, or market. Our inventory, which consists primarily of automotive parts and accessories, is used on vehicles. Because of the relatively long lives of vehicles, along with our historical experience of returning most excess inventory to our vendors for full credit, the risk of obsolescence is minimal. We establish a reserve for excess inventory for instances where less than full credit will be received for such returns and where we anticipate items will be sold at retail prices that are less than recorded costs. The reserve is based on management's judgment, including estimates and assumptions regarding marketability of products, the market value of inventory to be sold in future periods and on historical experiences where we received less than full credit from vendors for product returns. If our estimates regarding excess inventory are inaccurate, we may incur losses or gains that could be material. A 10% difference in our inventory reserves as of February 2, 2013 would have affected net earnings by approximately $0.2 million in fiscal 2012.

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    We record reserves for future sales returns, customer incentives, warranty claims and inventory shrinkage. The reserves are based on expected returns of products and historical claims and inventory shrinkage experience. If actual experience differs from historical levels, revisions in our estimates may be required. A 10% change in these reserves at February 2, 2013 would have affected net earnings by approximately $0.8 million for fiscal 2012.

    We have risk participation arrangements with respect to workers' compensation, general liability, automobile liability, other casualty coverage and health care insurance, including stop loss coverage with third party insurers to limit our total exposure. A reserve for the liabilities associated with these agreements is established using generally accepted actuarial methods followed in the insurance industry and our historical claims experience. The amounts included in our costs related to these arrangements are estimated and can vary based on changes in assumptions, claims experience or the providers included in the associated insurance programs. A 10% change in our self-insurance liabilities at February 2, 2013 would have affected net earnings by approximately $4.2 million for fiscal 2012.

    At fiscal year end 2012, we had six reporting units, of which three included goodwill. We test the recorded amount of goodwill for recovery on an annual basis in the fourth quarter of each fiscal year. More frequent impairment reviews may be triggered by any significant events or changes in circumstances affecting our business.

      Goodwill impairment testing consists of a two-step process, if necessary. The first step is to compare the fair value of a reporting unit with its carrying amount. If the carrying amount of a reporting unit exceeds its fair value, the second step of the impairment test must be performed in order to determine the amount of impairment loss, if any. The second step compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to the excess. The loss recognized cannot exceed the carrying amount of goodwill. The implied fair value of goodwill is determined in the same manner that the amount of goodwill recognized in a business combination is determined. We allocate the fair value of a reporting unit to all of the assets and liabilities of that unit, including intangible assets. Any excess of the value of a reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. A deterioration of macroeconomic conditions may not only negatively impact the estimated operating cash flows used in our cash flow models, but may also negatively impact other assumptions used in our analyses, including, but not limited to, the estimated cost of capital and/or discount rates. Additionally, in accordance with accounting guidance, we are required to ensure that assumptions used to determine fair value in the analyses are consistent with the assumptions a market participant would use. As a result, the cost of capital and/or discount rates used may increase or decrease based on market conditions and trends, regardless of whether our cost of capital has changed. Therefore we may recognize an impairment even though cash flows are approximately the same or greater than forecasted amounts.

      There were no impairments as a result of our annual tests in the fourth quarter of fiscal year 2012, fiscal year 2011, and fiscal year 2010.

    We periodically evaluate our long-lived assets for indicators of impairment. Management's judgments, including judgments related to store cash flows, are based on market and operating conditions at the time of evaluation. Future events could cause management's conclusion on impairment to change, requiring an adjustment of these assets to their then current fair market value.

    We have a share-based compensation plan, which includes stock options and restricted stock units, or RSUs. We account for our share-based compensation plans on a fair value basis. We

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      determine the fair value of our stock options at the date of the grant using the Black-Scholes option-pricing model. The RSUs are awarded at a price equal to the market price of our underlying stock on the date of the grant. In situations where we have granted stock options and RSUs with market conditions, we have used Monte Carlo simulations in estimating the fair value of the award. The pricing model and generally accepted valuation techniques require management to make assumptions and to apply judgment to determine the fair value of our awards. These assumptions and judgments include the expected life of stock options, expected stock price volatility, future employee stock option exercise behaviors and the estimate of award forfeitures. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to determine stock-based compensation expense. However, if actual results are different from these assumptions, the share-based compensation expense reported in our financial statements may not be representative of the actual economic cost of the share-based compensation. In addition, significant changes in these assumptions could materially impact our share-based compensation expense on future awards. A 10% change in our share-based compensation expense for fiscal 2012 would have affected net earnings by approximately $0.1 million.

    We are required to estimate our income taxes in each of the jurisdictions in which we operate. This requires us to estimate our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as depreciation of property and equipment and valuation of inventories, for tax and accounting purposes. We determine our provision for income taxes based on federal and state tax laws and regulations currently in effect. Legislation changes currently proposed by certain states in which we operate, if enacted, could increase our transactions or activities subject to tax. Any such legislation that becomes law could result in an increase in our state income tax expense and our state income taxes paid, which could have a material effect on our net earnings.

      At any one time our tax returns for many tax years are subject to examination by U.S. Federal, commonwealth, and state taxing jurisdictions. For income tax benefits related to uncertain tax positions to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. An uncertain income tax position will not be recognized in the financial statements unless it is more-likely-than-not to be sustained. We adjust these tax liabilities, as well as the related interest and penalties, based on the latest facts and circumstances, including recently published rulings, court cases, and outcomes of tax audits. To the extent our actual tax liability differs from our established tax liabilities for unrecognized tax benefits, our effective tax rate may be materially impacted. While it is often difficult to predict the final outcome of, the timing of, or the tax treatment of any particular tax position or deduction, we believe that our tax balances reflect the more-likely-than-not outcome of known tax contingencies.

      The temporary differences between the book and tax treatment of income and expenses result in deferred tax assets and liabilities, which are included within our consolidated balance sheets. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income. To the extent we believe that recovery is not more-likely-than-not, we must establish a valuation allowance. To the extent we establish a valuation allowance or change the allowance in a future period, income tax expense will be impacted. Actual results could differ from this assessment if adequate taxable income is not generated in future periods from either operations or projected tax planning strategies.

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RECENT ACCOUNTING STANDARDS

        In May of 2011, the FASB issued 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 periods beginning after December 15, 2011. This guidance amends certain accounting and disclosure requirements related to fair value measurements. The adoption of ASU 2011-04 did not have a material impact on our consolidated financial statements.

        In June of 2011, the FASB issued ASU No. 2011-05, "Presentation of Comprehensive Income" ("ASU 2011-05"). ASU 2011-05 was issued to improve the comparability of financial reporting between U.S. GAAP and International Financial Reporting Standards, and eliminates previous U.S. GAAP guidance that allowed an entity to present components of other comprehensive income ("OCI") as part of its statement of changes in shareholders' equity. With the issuance of ASU 2011-05, companies are now required to report all components of OCI either in a single continuous statement of total comprehensive income, which includes components of both OCI and net income, or in a separate statement appearing consecutively with the statement of income. ASU 2011-05 does not affect current guidance for the accounting of the components of OCI, or which items are included within total comprehensive income. ASU 2011-05 also states that reclassification adjustments between other comprehensive income and net income are presented separately on the face of the financial statements. 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 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 is effective prospectively for reporting periods beginning after December 15, 2012. The adoption of ASU 2011-05 affected presentation only and therefore did not have an impact on our consolidated financial condition, results of operations or cash flows. The adoption of ASU 2013-02 is not expected to impact our consolidated financial condition, results of operations or cash flows.

        In September of 2011, the FASB issued ASU 2011-08, "Intangibles—Goodwill and Other (Topic 350)—Testing Goodwill for Impairment" ("ASU 2011-08"). The new guidance provides entities with the option to perform a qualitative assessment of whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount before applying the quantitative two-step goodwill impairment test. If an entity concludes that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, it would not be required to perform the quantitative two-step goodwill impairment test. Entities also have the option to bypass the assessment of qualitative factors for any reporting unit in any period and proceed directly to performing the first step of the quantitative two-step goodwill impairment test, as was required prior to the issuance of this new guidance. The new guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, with early adoption permitted. The adoption of ASU 2011-08 did not have a material impact on our consolidated results of operations and financial condition.

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ITEM 7A    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        We have market rate exposure in our financial instruments due to changes in interest rates and prices.

Variable and Fixed Rate Debt

        Our Revolving Credit Agreement bears interest at daily LIBOR plus 2.00% to 2.50% based upon the then current availability under the facility. At February 2, 2013, there were no outstanding borrowings under the agreement. Additionally, we have a Senior Secured Term Loan facility due October 2018 with a balance of $200 million at February 2, 2013, that bears interest at LIBOR subject to a floor of 1.25%, plus 3.75%. Excluding our interest rate swap, a one percent change in the LIBOR rate would have affected net earnings by approximately $1.2 million for fiscal 2012. The risks related to changes in the LIBOR rate are substantially mitigated by our interest rate swap.

        The fair value of our Senior Subordinated Notes due October 2018 was $203.5 million at February 2, 2013. We determine fair value on our fixed rate debt by using quoted market prices and current interest rates.

Interest Rate Swaps

        On October 11, 2012, we settled our interest rate swap designated as a cash flow hedge on $145.0 million of our Term Loan prior to its amendment and restatement. The swap was used to minimize interest rate exposure and overall interest costs by converting the variable component of the total interest rate to a fixed rate of 5.036%. Since February 1, 2008, this swap was deemed to be fully effective and all adjustments in the interest rate swap's fair value have been recorded to accumulated other comprehensive loss. The settlement of this swap resulted in an interest charge of $7.5 million, which was previously recorded within accumulated other comprehensive loss.

        On October 11, 2012, we entered into two new interest rate swaps for a notional amount of $50.0 million each that together are designated as a cash flow hedge on the first $100.0 million of the amended and restated Term Loan. The interest rate swaps convert the variable LIBOR portion of the interest payments, subject to a floor of 1.25%, due on the first $100.0 million of the Term Loan to a fixed rate of 1.855%.

        As of February 2, 2013, the fair value of the new interest rate swaps was a net $1.6 million payable. As of January 28, 2012, the fair value of the previous swap, terminated in October 2012, was $12.5 million payable. The swap value is recorded within other long-term liabilities on the balance sheet.

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ITEM 8    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
The Pep Boys—Manny, Moe & Jack
Philadelphia, Pennsylvania

        We have audited the accompanying consolidated balance sheets of The Pep Boys—Manny, Moe & Jack and subsidiaries (the "Company") as of February 2, 2013 and January 28, 2012, and the related consolidated statements of operations and comprehensive income, stockholders' equity, and cash flows for each of the three fiscal years in the period ended February 2, 2013. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.

        We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of The Pep Boys—Manny, Moe & Jack and subsidiaries as of February 2, 2013 and January 28, 2012, and the results of their operations and their cash flows for each of the three fiscal years in the period ended February 2, 2013, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

        We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of February 2, 2013, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated April 18, 2013 expressed an unqualified opinion on the Company's internal control over financial reporting.

DELOITTE & TOUCHE LLP

Philadelphia, Pennsylvania
April 18, 2013

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CONSOLIDATED BALANCE SHEETS

The Pep Boys—Manny, Moe & Jack and Subsidiaries

(dollar amounts in thousands, except share data)

 
  February 2,
2013
  January 28,
2012
 

ASSETS

             

Current assets:

             

Cash and cash equivalents

  $ 59,186   $ 58,244  

Accounts receivable, less allowance for uncollectible accounts of $1,302 and $1,303

    23,897     25,792  

Merchandise inventories

    641,208     614,136  

Prepaid expenses

    28,908     26,394  

Other current assets

    60,438     59,979  
           

Total current assets

    813,637     784,545  
           

Property and equipment—net

    657,270     696,339  

Goodwill

    46,917     46,917  

Deferred income taxes

    47,691     72,870  

Other long-term assets

    38,434     33,108  
           

Total assets

  $ 1,603,949   $ 1,633,779  
           

LIABILITIES AND STOCKHOLDERS' EQUITY

             

Current liabilities:

             

Accounts payable

  $ 244,696   $ 243,712  

Trade payable program liability

    149,718     85,214  

Accrued expenses

    232,277     221,705  

Deferred income taxes

    58,441     66,208  

Current maturities of long-term debt

    2,000     1,079  
           

Total current liabilities

    687,132     617,918  
           

Long-term debt less current maturities

    198,000     294,043  

Other long-term liabilities

    53,818     77,216  

Deferred gain from asset sales

    127,427     140,273  

Stockholders' equity:

             

Common stock, par value $1 per share: authorized 500,000,000 shares; issued 68,557,041 shares

    68,557     68,557  

Additional paid-in capital

    295,679     296,462  

Retained earnings

    430,148     423,437  

Accumulated other comprehensive loss

    (980 )   (17,649 )

Treasury stock, at cost—15,431,298 shares and 15,803,322 shares

    (255,832 )   (266,478 )
           

Total stockholders' equity

    537,572     504,329  
           

Total liabilities and stockholders' equity

  $ 1,603,949   $ 1,633,779  
           

   

See notes to the consolidated financial statements

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CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

The Pep Boys—Manny, Moe & Jack and Subsidiaries

(dollar amounts in thousands, except per share data)

Year ended
  February 2, 2013
(53 weeks)
  January 28, 2012
(52 weeks)
  January 29, 2011
(52 weeks)
 

Merchandise sales

  $ 1,643,948   $ 1,642,757   $ 1,598,168  

Service revenue

    446,782     420,870     390,473  
               

Total revenues

    2,090,730     2,063,627     1,988,641  
               

Costs of merchandise sales

    1,159,994     1,154,322     1,110,380  

Costs of service revenue

    439,236     399,776     355,909  
               

Total costs of revenues

    1,599,230     1,554,098     1,466,289  
               

Gross profit from merchandise sales

    483,954     488,435     487,788  

Gross profit from service revenue

    7,546     21,094     34,564  
               

Total gross profit

    491,500     509,529     522,352  
               

Selling, general and administrative expenses

    463,416     443,986     442,239  

Pension settlement expense

    17,753          

Net gain from disposition of assets

    1,323     27     2,467  
               

Operating profit

    11,654     65,570     82,580  

Merger termination fees, net

    42,816          

Non-operating income

    2,012     2,324     2,609  

Interest expense

    33,982     26,306     26,745  
               

Earnings from continuing operations before income taxes and discontinued operations

    22,500     41,588     58,444  

Income tax expense

    9,345     12,460     21,273  
               

Earnings from continuing operations before discontinued operations

    13,155     29,128     37,171  

Loss from discontinued operations, net of tax benefit of $(186), $(121) and $(291)

    (345 )   (225 )   (540 )
               

Net earnings

  $ 12,810   $ 28,903   $ 36,631  
               

Basic earnings per share:

                   

Earnings from continuing operations before discontinued operations

  $ 0.25   $ 0.55   $ 0.71  

Loss from discontinued operations, net of tax

    (0.01 )   (0.01 )   (0.01 )
               

Basic earnings per share

  $ 0.24   $ 0.54   $ 0.70  
               

Diluted earnings per share:

                   

Earnings from continuing operations before discontinued operations

  $ 0.24   $ 0.54   $ 0.70  

Loss from discontinued operations, net of tax

            (0.01 )
               

Diluted earnings per share

  $ 0.24   $ 0.54   $ 0.69  
               

Other comprehensive income:

                   

Defined benefit plan adjustment, net of tax

    9,696     (3,120 )   582  

Derivative financial instruments adjustment, net of tax

    6,973     2,499     81  
               

Other comprehensive income

    16,669     (621 )   663  
               

Total comprehensive income

  $ 29,479   $ 28,282   $ 37,294  
               

   

See notes to the consolidated financial statements

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CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

The Pep Boys—Manny, Moe & Jack and Subsidiaries

(dollar amounts in thousands, except share data)

 
  Common Stock    
   
  Treasury Stock    
   
 
 
  Shares   Amount   Additional
Paid-in
Capital
  Retained
Earnings
  Shares   Amount   Accumulated
Other
Comprehensive
Loss
  Total
Stockholders'
Equity
 

Balance, January 30, 2010

    68,557,041     68,557     293,810     374,836     (16,164,074 )   (276,217 )   (17,691 )   443,295  
                                   

Comprehensive income:

                                                 

Net earnings

                      36,631                       36,631  

Changes in net unrecognized other postretirement benefit costs, net of tax of $344

                                        582     582  

Fair market value adjustment on derivatives, net of tax of $48

                                        81     81  
                                                 

Total comprehensive income

                                              37,294  

Cash dividends ($.12 per share)

                      (6,323 )                     (6,323 )

Effect of stock options and related tax benefits

                      (2,023 )   96,590     2,608           585  

Effect of restricted stock unit conversions

                (1,946 )         61,042     1,647           (299 )

Stock compensation expense

                3,497                             3,497  

Dividend reinvestment plan

                      (521 )   34,532     932           411  
                                   

Balance, January 29, 2011

    68,557,041   $ 68,557   $ 295,361   $ 402,600     (15,971,910 ) $ (271,030 ) $ (17,028 ) $ 478,460  
                                   

Comprehensive income:

                                                 

Net earnings

                      28,903                       28,903  

Changes in net unrecognized other postretirement benefit costs, net of tax of $(1,872)

                                        (3,120 )   (3,120 )

Fair market value adjustment on derivatives, net of tax of $1,499

                                        2,499     2,499  
                                                 

Total comprehensive income

                                              28,282  

Cash dividends ($.12 per share)

                      (6,344 )                     (6,344 )

Effect of stock options and related tax benefits

                      (900 )   45,321     1,223           323  

Effect of employee stock purchase plan

                      (335 )   20,963     566           231  

Effect of restricted stock unit conversions

                (2,136 )         70,228     1,897           (239 )

Stock compensation expense

                3,237                             3,237  

Dividend reinvestment plan

                      (487 )   32,076     866           379  
                                   

Balance, January 28, 2012

    68,557,041   $ 68,557   $ 296,462   $ 423,437     (15,803,322 ) $ (266,478 ) $ (17,649 ) $ 504,329  
                                   

Comprehensive income:

                                                 

Net earnings

                      12,810                       12,810  

Changes in net unrecognized other postretirement benefit costs, net of tax of $5,729

                                        9,696     9,696  

Fair market value adjustment on derivatives, net of tax of $4,208

                                        6,973     6,973  
                                                 

Total comprehensive income

                                              29,479  

Effect of stock options and related tax benefits

                375     (5,494 )   274,769     7,418           2,299  

Effect of employee stock purchase plan

                      (605 )   39,552     1,067           462  

Effect of restricted stock unit conversions

                (2,457 )         92,703     2,503           46  

Stock compensation expense

                1,299                             1,299  

Treasury stock repurchases

                            (35,000 )   (342 )         (342 )
                                   

Balance, February 2, 2013

    68,557,041   $ 68,557   $ 295,679   $ 430,148     (15,431,298 ) $ (255,832 ) $ (980 ) $ 537,572  
                                   

   

See notes to the consolidated financial statements

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CONSOLIDATED STATEMENTS OF CASH FLOWS

The Pep Boys—Manny, Moe & Jack and Subsidiaries

(dollar amounts in thousands)

 
  Year Ended  
 
  February 2,
2013
  January 28,
2012
  January 29,
2011
 

Cash flows from operating activities:

                   

Net earnings

  $ 12,810   $ 28,903   $ 36,631  

Adjustments to reconcile net earnings to net cash provided by continuing operations:

                   

Net loss from discontinued operations

    345     225     540  

Depreciation and amortization

    78,805     79,390     74,366  

Amortization of deferred gain from asset sales

    (12,846 )   (12,602 )   (12,602 )

Stock compensation expense

    1,299     3,237     3,497  

Loss from debt retirement

            200  

Deferred income taxes

    7,576     10,301     18,572  

Net gain from dispositions of assets

    (1,323 )   (27 )   (2,467 )

Loss from asset impairment

    10,555     1,619     970  

Other

    30     (421 )   (694 )

Changes in operating assets and liabilities, net of the effects of acquisitions:

                   

Decrease in accounts receivable, prepaid expenses and other

    3,829     2,391     7,060  

Increase in merchandise inventories

    (27,074 )   (42,756 )   (5,284 )

Increase in accounts payable

    984     24,871     7,466  

Increase (decrease) in accrued expenses

    10,481     (18,745 )   (8,394 )

Increase (decrease) in other long-term liabilities

    3,487     (2,463 )   (1,200 )
               

Net cash provided by continuing operations

    88,958     73,923     118,661  

Net cash used in discontinued operations

    (467 )   (273 )   (1,466 )
               

Net cash provided by operating activities

    88,491     73,650     117,195  
               

Cash flows from investing activities:

                   

Capital expenditures

    (54,696 )   (74,746 )   (70,252 )

Proceeds from dispositions of assets

    5,588     515     7,515  

Collateral investment

    (3,654 )   (7,638 )   (9,638 )

Acquisitions, net of cash acquired. 

        (42,901 )   (288 )

Premiums paid on life insurance policies

        (837 )    
               

Net cash used in continuing operations

    (52,762 )   (125,607 )   (72,663 )

Net cash provided by discontinued operations

            569  
               

Net cash used in investing activities

    (52,762 )   (125,607 )   (72,094 )
               

Cash flows from financing activities:

                   

Borrowings under line of credit agreements

    2,319     5,721     21,795  

Payments under line of credit agreements

    (2,319 )   (5,721 )   (21,795 )

Borrowings on trade payable program liability

    179,751     144,180     121,824  

Payments on trade payable program liability

    (115,247 )   (115,253 )   (99,636 )

Payments for finance issuance cost

    (6,520 )   (2,441 )    

Borrowings under new debt

    200,000          

Debt payments

    (295,122 )   (1,079 )   (11,279 )

Dividends paid

        (6,344 )   (6,323 )

Repurchase of common stock

    (342 )        

Proceeds from stock issuance

    2,693     898     1,227  
               

Net cash (used in) provided by financing activities

    (34,787 )   19,961     5,813  
               

Net increase (decrease) in cash and cash equivalents

    942     (31,996 )   50,914  

Cash and cash equivalents at beginning of year

    58,244     90,240     39,326  
               

Cash and cash equivalents at end of year

    59,186   $ 58,244   $ 90,240  
               

Supplemental cash flow information:

                   

Cash paid for interest, net of amounts capitalized

  $ 31,290   $ 23,097   $ 23,098  

Cash received from income tax refunds

  $ 108   $ 479   $ 195  

Cash paid for income taxes

  $ 2,826   $ 1,150   $ 890  

Non-cash investing activities:

                   

Accrued purchases of property and equipment

  $ 1,371   $ 1,400   $ 2,926  

   

See notes to the consolidated financial statements

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THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended February 2, 2013, January 28, 2012 and January 29, 2011

NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

        The Pep Boys—Manny, Moe & Jack and subsidiaries (the "Company") consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"). The preparation of the Company's financial statements requires the Company to make estimates and assumptions that affect the reported amounts of assets, liabilities, net sales, costs and expenses, as well as the disclosure of contingent assets and liabilities and other related disclosures. The Company bases its estimates on historical experience and on various other assumptions that management believes to be reasonable under the circumstances, the results of which form the basis for making judgments about carrying values of the Company's assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates, and the Company includes any revisions to its estimates in the results for the period in which the actual amounts become known.

        The Company believes the significant accounting policies described below affect the more significant judgments and estimates used in the preparation of its consolidated financial statements. Accordingly, these are the policies the Company believes are the most critical to aid in fully understanding and evaluating the historical consolidated financial condition and results of operations.

        BUSINESS    The Company operates in the U.S. automotive aftermarket, which has two general lines of business: (1) the Service business, commonly known as Do-It-For-Me, or "DIFM" (service labor, installed merchandise and tires) and (2) the Retail business, commonly known as Do-It-Yourself, or "DIY" (retail merchandise) and commercial. The Company's primary store format is the Supercenter, which serves both "DIFM" and "DIY" customers with the highest quality service offerings and merchandise. As part of the Company's long-term strategy to lead with automotive service, the Company is complementing the existing Supercenter store base with Service & Tire Centers. These Service & Tire Centers are designed to capture market share and leverage the existing Supercenter and support infrastructure. The Company currently operates stores in 35 states and Puerto Rico.

        FISCAL YEAR END    The Company's fiscal year ends on the Saturday nearest to January 31. Fiscal 2012, which ended February 2, 2013, was comprised of 53 weeks. Fiscal 2011, which ended January 28, 2012, and fiscal 2010 which ended January 29, 2011 were comprised of 52 weeks.

        PRINCIPLES OF CONSOLIDATION    The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated.

        CASH AND CASH EQUIVALENTS    Cash equivalents include all short-term, highly liquid investments with an initial maturity of three months or less when purchased. All credit and debit card transactions that settle in less than seven days are also classified as cash and cash equivalents.

        ACCOUNTS RECEIVABLE    Accounts receivable are primarily comprised of amounts due from commercial customers. The Company records an allowance for doubtful accounts based upon an evaluation of the credit worthiness of its customers. The allowance is reviewed for adequacy at least quarterly, and adjusted as necessary. Specific accounts are written off against the allowance when management determines the account is uncollectible.

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THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years ended February 2, 2013, January 28, 2012 and January 29, 2011

NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

        MERCHANDISE INVENTORIES    Merchandise inventories are valued at the lower of cost or market. Cost is determined by using the last-in, first-out (LIFO) method. If the first-in, first-out (FIFO) method of costing inventory had been used by the Company, inventory would have been $565.8 million and $536.4 million as of February 2, 2013 and January 28, 2012, respectively. During fiscal 2012, 2011 and 2010, the effect of LIFO layer liquidations on gross profit was immaterial.

        The Company's inventory, consisting primarily of automotive tires, parts, and accessories, is used on vehicles typically having long lives. Because of this, and combined with the Company's historical experience of returning excess inventory to the Company's vendors for full credit, the risk of obsolescence is minimal. The Company establishes a reserve for excess inventory for instances where less than full credit will be received for such returns or where the Company anticipates items will be sold at retail prices that are less than recorded costs. The reserve is based on management's judgment, including estimates and assumptions regarding marketability of products, the market value of inventory to be sold in future periods and on historical experiences where the Company received less than full credit from vendors for product returns. The Company also provides for estimated inventory shrinkage based upon historical levels and the results of its cycle counting program. The Company's inventory adjustments for these matters were approximately $4.6 million at February 2, 2013 and January 28, 2012, respectively. In future periods the company may be exposed to material losses should the company's vendors alter their policy with regard to accepting excess inventory returns.

        PROPERTY AND EQUIPMENT    Property and equipment are recorded at cost. Depreciation and amortization are computed using the straight-line method over the following estimated useful lives: building and improvements, 5 to 40 years, and furniture, fixtures and equipment, 3 to 10 years. Maintenance and repairs are charged to expense as incurred. Upon retirement or sale, the cost and accumulated depreciation are eliminated and the gain or loss, if any, is included in the determination of net income. Property and equipment information follows:

(dollar amounts in thousands)
  February 2,
2013
  January 28,
2012
 

Land

  $ 203,386   $ 204,023  

Buildings and improvements

    885,389     875,999  

Furniture, fixtures and equipment

    728,122     723,938  

Construction in progress

    3,282     3,279  

Accumulated depreciation and amortization

    (1,162,909 )   (1,110,900 )
           

Property and equipment—net

  $ 657,270   $ 696,339  
           

        GOODWILL    At fiscal year end 2012, the Company had six reporting units, of which three included goodwill (related to prior acquisitions by the Company). The Company tests the recorded amount of goodwill for recovery on an annual basis in the fourth quarter of each fiscal year. Impairment reviews may also be triggered by any significant events or changes in circumstances affecting the Company's business.

        Goodwill impairment testing consists of a two-step process, if necessary. The first step is to compare the fair value of a reporting unit with its carrying amount. If the carrying amount of a reporting unit exceeds its fair value, the second step of the impairment test must be performed in order

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THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years ended February 2, 2013, January 28, 2012 and January 29, 2011

NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

to determine the amount of impairment loss, if any. The second step compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to the excess. The loss recognized cannot exceed the carrying amount of goodwill. The implied fair value of goodwill is determined in the same manner that the amount of goodwill recognized in a business combination is determined. The Company allocates the fair value of a reporting unit to all of the assets and liabilities of that unit, including intangible assets. Any excess of the value of a reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. A deterioration of macroeconomic conditions may not only negatively impact the estimated operating cash flows used in the Company's cash flow models, but may also negatively impact other assumptions used in the Company's analyses, including, but not limited to, the estimated cost of capital and/or discount rates. Additionally, in accordance with accounting guidance, the Company is required to ensure that assumptions used to determine fair value in the analyses are consistent with the assumptions a market participant would use. As a result, the cost of capital and/or discount rates used may increase or decrease based on market conditions and trends, regardless of whether the Company's cost of capital has changed. Therefore the Company may recognize an impairment even though cash flows are approximately the same or greater than forecasted amounts.

        There were no impairments as a result of the Company's annual tests in the fourth quarter of fiscal year 2012, fiscal year 2011, and fiscal year 2010.

        OTHER INTANGIBLE ASSETS    For intangible assets with finite lives, the Company amortizes their cost on a straight-line basis over their estimated useful lives.

        LEASES    The Company amortizes leasehold improvements over the lesser of the lease term or the economic life of those assets. Generally, for stores the lease term is the base lease term and for distribution centers the lease term includes the base lease term plus certain renewal option periods for which renewal is reasonably assured and for which failure to exercise the renewal option would result in an economic penalty to the Company. The calculation of straight-line rent expense is based on the same lease term with consideration for step rent provisions, escalation clauses, rent holidays and other lease concessions. The Company begins expensing rent upon completion of the Company's due diligence or when the Company has the right to use the property, whichever comes earlier.

        SOFTWARE CAPITALIZATION    The Company capitalizes certain direct development costs associated with internal-use software, including external direct costs of material and services, and payroll costs for employees devoting time to the software projects. These costs are amortized over a period not to exceed five years beginning when the asset is substantially ready for use. Costs incurred during the preliminary project stage, as well as maintenance and training costs are expensed as incurred.

        TRADE PAYABLE PROGRAM LIABILITY    The Company has a trade payable program which is funded by various bank participants who have the ability, but not the obligation, to purchase account receivables owed by the Company directly from its vendors. The Company, in turn, makes the regularly scheduled full vendor payments to the bank participants.

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THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years ended February 2, 2013, January 28, 2012 and January 29, 2011

NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

        INCOME TAXES    The Company uses the asset and liability method of accounting for income taxes. Deferred income taxes are determined based upon enacted tax laws and rates applied to the differences between the financial statement and tax bases of assets and liabilities.

        The Company recognizes taxes payable for the current year, as well as deferred tax assets and liabilities for the future tax consequences of events that have been recognized in the Company's financial statements or tax returns. The Company must assess the likelihood that any recorded deferred tax assets will be recovered against future taxable income. To the extent the Company believes it is more likely than not that the asset will not be recoverable, a valuation allowance must be established. To the extent the Company establishes a valuation allowance or changes the allowance in a future period, income tax expense will be impacted.

        In evaluating income tax positions, the Company records liabilities for potential exposures. These tax liabilities are adjusted in the period actual developments give rise to such change. Those developments could be, but are not limited to, settlement of tax audits, expiration of the statute of limitations, and changes in the tax code and regulations, along with varying application of tax policy and administration within those jurisdictions. Refer to Note 8, "Income Taxes," for further discussion of income taxes and changes in unrecognized tax benefit.

        SALES TAXES    The Company presents sales net of sales taxes in its consolidated statements of operations.

        REVENUE RECOGNITION    The Company recognizes revenue from the sale of merchandise at the time the merchandise is sold and the product is delivered to the customer. Service revenues are recognized upon completion of the service. Service revenue consists of the labor charged for installing merchandise or maintaining or repairing vehicles, excluding the sale of any installed parts or materials. The Company records revenue net of an allowance for estimated future returns. The Company establishes reserves for sales returns and allowances based on current sales levels and historical return rates. Revenue from gift card sales is recognized upon gift card redemption. The Company's gift cards do not have expiration dates. The Company recognizes breakage on gift cards when, among other things, sufficient gift card history is available to estimate potential breakage and the Company determines there are no legal obligations to remit the value of unredeemed gift cards to the relevant jurisdictions. Estimated gift card breakage revenue is immaterial for all periods presented.

        The Company's Customer Loyalty program allows members to earn points for each qualifying purchase. Points earned allow members to receive a certificate that may be redeemed on future purchases within 90 days of issuance. The retail value of points earned by loyalty program members is included in accrued liabilities as deferred income and recorded as a reduction of revenue at the time the points are earned, based on the historic and projected rate of redemption. The Company recognizes deferred revenue and the cost of the free products distributed to loyalty program members when the awards are redeemed. The cost of the free products distributed to program members is recorded within costs of revenues.

        A portion of the Company's transactions includes the sale of auto parts that contain a core component. These components represent the recyclable portion of the auto part. Customers are not charged for the core component of the new part if a used core is returned at the point of sale of the

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THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years ended February 2, 2013, January 28, 2012 and January 29, 2011

NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

new part; otherwise the Company charges customers a specified amount for the core component. The Company refunds that same amount upon the customer returning a used core to the store at a later date. The Company does not recognize sales or cost of sales for the core component of these transactions when a used part is returned by the customer at the point of sale.

        COSTS OF REVENUES    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, service center occupancy costs and cost of providing free or discounted towing services to customers. Occupancy costs include utilities, rents, real estate and property taxes, repairs, maintenance, depreciation and amortization expenses.

        VENDOR SUPPORT FUNDS    The Company receives various incentives in the form of discounts and allowances from its vendors based on purchases or for services that the Company provides to the vendors. These incentives received from vendors include rebates, allowances and promotional funds and are generally based upon a percentage of the gross amount purchased. Funds are recorded when title of goods purchased have transferred to the Company as the amount is known and not contingent on future events. The amount of funds to be received are subject to vendor agreements and ongoing negotiations that may be impacted in the future based on changes in market conditions, vendor marketing strategies and changes in the profitability or sell-through of the related merchandise for the Company.

        Generally vendor support funds are earned based on purchases or product sales. These incentives are treated as a reduction of inventories and are recognized as a reduction to cost of sales as the inventories are sold. Certain vendor allowances are used exclusively for promotions and to offset certain other direct expenses if the Company determines the allowances are for specific, identifiable incremental expenses. Vendor support funds used to offset direct advertising costs were immaterial for the year ended February 2, 2013, $2.5 million for the year ended January 28, 2012, and immaterial for the year ended January 29, 2011.

        WARRANTY RESERVE    The Company provides warranties for both its merchandise sales and service labor. Warranties for merchandise are generally covered by the respective vendors, with the Company covering any costs above the vendor's stipulated allowance. Service labor is warranted in full by the Company for a limited specific time period. The Company establishes its warranty reserves based on historical experience. These costs are included in either costs of merchandise sales or costs of service revenue in the consolidated statement of operations.

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THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years ended February 2, 2013, January 28, 2012 and January 29, 2011

NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

        The reserve for warranty activity for the years ended February 2, 2013 and January 28, 2012, respectively, are as follows:

(dollar amounts in thousands)
   
 

Balance, January 29, 2011

  $ 673  

Additions related to sales in the current year

    12,122  

Warranty costs incurred in the current year

    (12,122 )
       

Balance, January 28,2012

  $ 673  

Additions related to sales in the current year

    11,920  

Warranty costs incurred in the current year

    (11,729 )
       

Balance, February 2, 2013

  $ 864  
       

        ADVERTISING    The Company expenses the costs of advertising the first time the advertising takes place. Gross advertising expense for fiscal 2012, 2011 and 2010 was $63.3 million, $54.9 million and $57.5 million, respectively, and is recorded in selling, general and administrative expenses. No advertising costs were recorded as assets as of February 2, 2013 or January 28, 2012.

        STORE OPENING COSTS    The costs of opening new stores are expensed as incurred.

        IMPAIRMENT OF LONG-LIVED ASSETS    The Company evaluates the ability to recover long-lived assets whenever events or circumstances indicate that the carrying value of the asset may not be recoverable. In the event assets are impaired, losses are recognized to the extent the carrying value exceeds fair value. In addition, the Company reports assets to be disposed of at the lower of the carrying amount or the fair market value less selling costs. See discussion of current year impairments in Note 11, "Store Closures and Asset Impairments."

        EARNINGS PER SHARE    Basic earnings per share are computed by dividing earnings by the weighted average number of common shares outstanding during the year. Diluted earnings per share are computed by dividing earnings by the weighted average number of common shares outstanding during the year plus incremental shares that would have been outstanding upon the assumed exercise of dilutive stock based compensation awards.

        DISCONTINUED OPERATIONS    The Company's discontinued operations reflect the operating results for closed stores where the customer base could not be maintained. Loss from discontinued operations relates to expenses for previously closed stores and principally includes costs for rent, taxes, payroll, repairs and maintenance, asset impairments, and gains or losses on disposal.

        ACCOUNTING FOR STOCK-BASED COMPENSATION    At February 2, 2013, the Company has two stock-based employee compensation plans, which are described in Note 14, "Equity Compensation Plans." Compensation costs relating to share-based payment transactions are recognized in the financial statements. The cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the employee's requisite service period (generally the vesting period of the equity award).

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THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years ended February 2, 2013, January 28, 2012 and January 29, 2011

NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

        COMPREHENSIVE INCOME    Other comprehensive income includes pension liability and fair market value of cash flow hedges.

        DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES    The Company may enter into interest rate swap agreements to hedge the exposure to increasing rates with respect to its certain variable rate debt agreements. The Company recognizes all derivatives as either assets or liabilities in the statement of financial position and measures those instruments at fair value. See further discussion in Note 5, "Debt and Financing Arrangements."

        SEGMENT INFORMATION    The Company has six operating segments defined by geographic regions which are Northeast, Mid-Atlantic, Southeast, Central, West and Southern CA. Each segment serves both DIY and DIFM lines of business. The Company aggregates all of its operating segments and has one reportable segment. Sales by major product categories are as follows:

 
  Year ended  
(dollar amounts in thousands)
  February 2,
2013
  January 28,
2012
  January 29,
2011
 

Parts and accessories

  $ 1,252,617   $ 1,259,500   $ 1,261,678  

Tires

    391,331     383,257     336,490  

Service labor

    446,782     420,870     390,473  
               

Total revenues

  $ 2,090,730   $ 2,063,627   $ 1,988,641  
               

        SIGNIFICANT SUPPLIERS    During fiscal 2012, the Company's ten largest suppliers accounted for approximately 51% of merchandise purchased. Only one supplier accounted for more than 10% of the Company's purchases. Other than a commitment to purchase 4.2 million units of oil products at various prices over a two-year period, the Company has no long-term contracts or minimum purchase commitments under which the Company is required to purchase merchandise. Open purchase orders are based on current inventory or operational needs and are fulfilled by vendors within short periods of time and generally are not binding agreements.

        SELF INSURANCE    The Company has risk participation arrangements with respect to workers' compensation, general liability, automobile liability, and other casualty coverages. The Company has a wholly owned captive insurance subsidiary through which it reinsures this retained exposure. This subsidiary uses both risk sharing treaties and third party insurance to manage this exposure. In addition, the Company self insures certain employee-related health care benefit liabilities. The Company maintains stop loss coverage with third party insurers through which it reinsures certain of its casualty and health care benefit liabilities. The Company records both liabilities and reinsurance receivables using actuarial methods utilized in the insurance industry based upon historical claims experience.

        RECLASSIFICATION    Certain prior period amounts have been reclassified to conform to current period presentation. These reclassifications had no effect on reported totals for assets, liabilities, shareholders' equity, cash flows or net income.

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THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years ended February 2, 2013, January 28, 2012 and January 29, 2011

NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

RECENT ACCOUNTING STANDARDS

        In May of 2011, the FASB issued 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 periods beginning after December 15, 2011. This guidance amends certain accounting and disclosure requirements related to fair value measurements. The adoption of ASU 2011-04 did not have a material impact on the Company's consolidated financial statements.

        In June of 2011, the FASB issued ASU No. 2011-05, "Presentation of Comprehensive Income" ("ASU 2011-05"). ASU 2011-05 was issued to improve the comparability of financial reporting between U.S. GAAP and International Financial Reporting Standards, and eliminates previous U.S. GAAP guidance that allowed an entity to present components of other comprehensive income ("OCI") as part of its statement of changes in shareholders' equity. With the issuance of ASU 2011-05, companies are now required to report all components of OCI either in a single continuous statement of total comprehensive income, which includes components of both OCI and net income, or in a separate statement appearing consecutively with the statement of income. ASU 2011-05 does not affect current guidance for the accounting of the components of OCI, or which items are included within total comprehensive income. ASU 2011-05 also states that reclassification adjustments between other comprehensive income and net income are presented separately on the face of the financial statements. 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 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 is effective prospectively for reporting periods beginning after December 15, 2012. The adoption of ASU 2011-05 affected presentation only and therefore did not have an impact on the Company's consolidated financial condition, results of operations or cash flows. The adoption of ASU 2013-02 is not expected to impact the Company's consolidated financial condition, results of operations or cash flows.

        In September of 2011, the FASB issued ASU 2011-08, "Intangibles—Goodwill and Other (Topic 350)—Testing Goodwill for Impairment" ("ASU 2011-08"). The new guidance provides entities with the option to perform a qualitative assessment of whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount before applying the quantitative two-step goodwill impairment test. If an entity concludes that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, it would not be required to perform the quantitative two-step goodwill impairment test. Entities also have the option to bypass the assessment of qualitative factors for any reporting unit in any period and proceed directly to performing the first step of the quantitative two-step goodwill impairment test, as was required prior to the issuance of this new guidance. The new guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, with early adoption permitted. The adoption of ASU 2011-08 did

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THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years ended February 2, 2013, January 28, 2012 and January 29, 2011

NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

not have a material impact on the Company's consolidated results of operations and financial condition.

NOTE 2—ACQUISITIONS

        During fiscal 2011, the Company made three separate acquisitions. The Company acquired the assets related to seven service and tire centers located in the Seattle-Tacoma area, the assets related to seven service and tire centers located in the Houston, Texas area and all outstanding shares of capital stock of Tire Stores Group Holding Corporation which operated an 85-store chain in Florida, Georgia and Alabama under the name Big 10. Collectively, the acquired stores produced approximately $94.7 million (unaudited) in sales annually based on pre-acquisition historical information. The total purchase price of these stores was approximately $42.6 million in cash and the assumption of certain liabilities. The acquisitions were financed through cash flows provided by operations. The results of operations of these acquired stores are included in the Company's results from their respective acquisition dates.

        The Company has recorded its initial accounting for these acquisitions in accordance with accounting guidance on business combinations. The acquisitions resulted in goodwill related to, among other things, growth opportunities and assembled workforces. A portion of the goodwill is expected to be deductible for tax purposes. The Company has recorded finite-lived intangible assets at their estimated fair value related to trade names, favorable and unfavorable leases.

        The Company expensed all costs related to these acquisitions during fiscal 2011. The total costs related to these acquisitions were $1.5 million and are included in the consolidated statement of operations within selling, general and administrative expenses.

        The purchase price of the acquisitions has been allocated to the net tangible and intangible assets acquired, with the remainder recorded as goodwill on the basis of estimated fair values. The allocation is as follows:

(dollar amounts in thousands)
  As of
Acquisition
Dates
 

Current assets

  $ 11,421  

Intangible assets

    950  

Other non-current assets

    9,149  

Current liabilities

    (13,817 )

Long-term liabilities

    (9,458 )
       

Total net identifiable assets acquired

  $ (1,755 )
       

Total consideration transferred, net of cash acquired

  $ 42,614  

Less: total net identifiable assets acquired

    (1,755 )
       

Goodwill

  $ 44,369  
       

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THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years ended February 2, 2013, January 28, 2012 and January 29, 2011

NOTE 2—ACQUISITIONS (Continued)

        Intangible assets consist of trade names ($0.6 million) and favorable leases ($0.3 million). Long-term liabilities include unfavorable leases ($9.1 million). The trade names are being amortized over their estimated useful life of 3 years. The favorable and unfavorable lease intangible assets and liabilities are being amortized to rent expense over their respective lease terms, ranging from 2 to 16 years. Amortization expense for the favorable and unfavorable leases over the next four years is approximately $0.6 million per year. Deferred tax assets in the amount of $6.8 million are primarily recorded in other non-current liabilities.

        Sales for the fiscal 2011 acquired stores totaled $63.9 million from acquisition date through January 28, 2012. The net loss for the acquired stores for the period from acquisition date through January 28, 2012 was $2.0 million, excluding transition related expenses.

        As the acquisitions (including Big 10) were immaterial to the operating results both individually and in aggregate for the fifty-two week periods ended January 28, 2012 and January 29, 2011, pro forma results for the fifty-two week period ended January 28, 2012 are not presented.

        In 2011, the Company recorded a reduction to the contingent consideration of $0.7 million related to one of the Company's acquisitions. The reversal of contingent consideration was recorded to selling, general and administrative expenses in the consolidated statements of operations.

NOTE 3—OTHER CURRENT ASSETS

        The following are the components of other current assets:

(dollar amounts in thousands)
  February 2,
2013
  January 28,
2012
 

Reinsurance receivable

  $ 59,160   $ 59,280  

Income taxes receivable

    668     89  

Other

    610     610  
           

Total

  $ 60,438   $ 59,979  
           

NOTE 4—ACCRUED EXPENSES

        The following are the components of accrued expenses:

(dollar amounts in thousands)
  February 2,
2013
  January 28,
2012
 

Casualty and medical risk insurance

  $ 152,606   $ 147,806  

Accrued compensation and related taxes

    27,641     19,133  

Sales tax payable

    11,556     12,254  

Other

    40,474     42,512  
           

Total

  $ 232,277   $ 221,705  
           

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THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years ended February 2, 2013, January 28, 2012 and January 29, 2011

NOTE 5—DEBT AND FINANCING ARRANGEMENTS

        The following are the components of debt and financing arrangements:

(dollar amounts in thousands)
  February 2,
2013
  January 28,
2012
 

7.50% Senior Subordinated Notes, due December 2014

  $   $ 147,565  

Senior Secured Term Loan, due October 2013

        147,557  

Senior Secured Term Loan, due October 2018

    200,000      

Revolving Credit Agreement, through July 2016

         
           

Long-term debt

    200,000     295,122  

Current maturities

    (2,000 )   (1,079 )
           

Long-term debt less current maturities

  $ 198,000   $ 294,043  
           

    Senior Secured Term Loan Facility due October 2018

        On October 11, 2012, the Company entered into the Second Amended and Restated Credit Agreement that (i) increased the size of the Company's Senior Secured Term Loan (the "Term Loan") to $200.0 million, (ii) extended the maturity of the Term Loan from October 27, 2013 to October 11, 2018, (iii) reset the interest rate under the Term Loan to the London Interbank Offered Rate (LIBOR), subject to a floor of 1.25%, plus 3.75% and (iv) added an additional 16 of the Company's owned locations to the collateral pool securing the Term Loan. The amended and restated Term Loan was deemed to be substantially different than the prior Term Loan, and therefore the modification of the debt was treated as a debt extinguishment. As of February 2, 2013, 142 stores collateralized the Term Loan. The Company recorded $6.5 million of deferred financing costs related to the Second Amended and Restated Credit Agreement. The amount outstanding under the Term Loan as of February 2, 2013 was $200.0 million.

        Net proceeds from the amended and restated Term Loan together with cash on hand were used to settle the Company's outstanding interest rate swap on the Term Loan as structured prior to its amendment and restatement and to satisfy and discharge all of the Company's outstanding 7.5% Senior Subordinated Notes ("Notes") due 2014. The settlement of the interest rate swap resulted in the reclassification of $7.5 million of accumulated other comprehensive loss to interest expense. The Company recognized, in interest expense, $1.9 million of deferred financing costs related to the Notes and the Term Loan as structured prior to its amendment and restatement. The interest payment and the swap settlement payment are presented within cash flows from operations on the consolidated statement of cash flows.

        On October 11, 2012, the Company entered into two new interest rate swaps for a notional amount of $50.0 million each that together were designated as a cash flow hedge on the first $100.0 million of the Term Loan. The interest rate swaps convert the variable LIBOR portion of the interest payments due on the first $100.0 million of the Term Loan to a fixed rate of 1.855%.

    Revolving Credit Agreement, Through July 2016

        On January 16, 2009 the Company entered into a Revolving Credit Agreement (the "Agreement") with available borrowings up to $300.0 million and a maturity of January 2014. Total incurred fees of

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THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years ended February 2, 2013, January 28, 2012 and January 29, 2011

NOTE 5—DEBT AND FINANCING ARRANGEMENTS (Continued)

$6.8 million were capitalized and are being amortized over the original five year life of the facility. On July 26, 2011, the Company amended and restated the Agreement to reduce its interest rate by 75 basis points and to extend its maturity to July 2016. The Company's ability to borrow under the Agreement is based on a specific borrowing base consisting of inventory and accounts receivable. The interest rate on this credit line is daily LIBOR plus 2.00% to 2.50% based upon the then current availability under the Agreement. As of February 2, 2013, the Company had no borrowings outstanding under the Agreement and $37.4 million of availability was utilized to support outstanding letters of credit. Taking this into account, the borrowings under the vendor financing program, and the borrowing base requirements, as of February 2, 2013, there was $141.2 million of availability remaining under the Agreement.

    Other Matters

        The Company's debt agreements require compliance with covenants. The most restrictive of these covenants, an earnings before interest, taxes, depreciation and amortization ("EBITDA") requirement, is triggered if the Company's availability under its Revolving Credit Agreement plus unrestricted cash drops below $50.0 million. As of February 2, 2013, the Company was in compliance with all financial covenants contained in its debt agreements.

        The weighted average interest rate on all debt borrowings during fiscal 2012 and 2011 was 4.5% and 6.3%, respectively.

    Other Contractual Obligations

        The Company has a vendor financing program with availability up to $175.0 million which is funded by various bank participants who have the ability, but not the obligation, to purchase account receivables owed by the Company directly from vendors. The Company, in turn, makes the regularly scheduled full vendor payments to the bank participants. There was an outstanding balance of $149.7 million and $85.2 million under the program as of February 2, 2013 and January 28, 2012, respectively.

        The Company has letter of credit arrangements in connection with its risk management, import merchandising and vendor financing programs. The Company had $5.2 million outstanding commercial letters of credit as of February 2, 2013. There were no outstanding commercial letters of credit as of January 28, 2012. The Company was contingently liable for $32.2 million and $31.7 million in outstanding standby letters of credit as of February 2, 2013 and January 28, 2012, respectively.

        The Company is also contingently liable for surety bonds in the amount of approximately $11.5 million and $8.3 million as of February 2, 2013 and January 28, 2012, respectively. The surety bonds guarantee certain payments (for example utilities, easement repairs, licensing requirements and customs fees).

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THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years ended February 2, 2013, January 28, 2012 and January 29, 2011

NOTE 5—DEBT AND FINANCING ARRANGEMENTS (Continued)

        The annual maturities under the Senior Secured Term Loan, due October 2018, for the next five fiscal years are:

 
  Long-Term
Debt
 
(dollar amounts in thousands)
 
Fiscal Year
 

2013

  $ 2,000  

2014

    2,000  

2015

    2,000  

2016

    2,000  

2017

    2,000  

Thereafter

    190,000  
       

Total

  $ 200,000  
       

        Interest rates that are currently available to the Company for issuance of debt with similar terms and remaining maturities are used to estimate fair value for debt obligations and are considered a level 2 measure under the fair value hierarchy. The estimated fair value of long-term debt including current maturities was $203.5 million and $293.6 million as of February 2, 2013 and January 28, 2012, respectively

NOTE 6—LEASE AND OTHER COMMITMENTS

        In fiscal 2010, the Company sold one property to an unrelated third party. Net proceeds from this sale were $1.6 million. Concurrent with this sale, the Company entered into an agreement to lease the property back from the purchaser over a minimum lease term of 15 years. The Company classified this lease as an operating lease. The Company actively uses this property and considers the lease as a normal leaseback. The Company recorded a deferred gain of $0.4 million.

        In connection with the three acquisitions that occurred during fiscal 2011, the Company assumed additional lease obligations totaling $120.2 million over an average of 14 years.

        The aggregate minimum rental payments for all leases having initial terms of more than one year are as follows:

 
  Operating
Leases
 
(dollar amounts in thousands)
 
Fiscal Year
 

2013

    102,609  

2014

    98,205  

2015

    91,092  

2016

    83,707  

2017

    76,034  

Thereafter

    340,076  
       

Aggregate minimum lease payments

  $ 791,723  
       

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THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years ended February 2, 2013, January 28, 2012 and January 29, 2011

NOTE 6—LEASE AND OTHER COMMITMENTS (Continued)

        Rental expenses incurred for operating leases in fiscal 2012, 2011, and 2010 were $97.9 million, $91.6 million and $79.7 million, respectively, and are recorded primarily in cost of revenues. The deferred gain for all sale leaseback transactions is being recognized in costs of merchandise sales and costs of service revenues over the minimum term of these leases.

NOTE 7—ASSET RETIREMENT OBLIGATIONS

        The Company records asset retirement obligations as incurred and when reasonably estimable, including obligations for which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the Company. The obligation principally represents the removal of leasehold improvements from stores upon termination of store leases. The obligations are recorded as liabilities at fair value using discounted cash flows and are accreted over the lease term. Costs associated with the obligations are capitalized and amortized over the estimated remaining useful life of the asset.

        The Company has recorded a liability pertaining to the asset retirement obligation in other long-term liabilities on its consolidated balance sheet. Changes in assumptions reflect favorable experience with the rate of occurrence of obligations and expected settlement dates. The liability for asset retirement obligations activity from January 29, 2011 through February 2, 2013 is as follows:

(dollar amounts in thousands)
   
 

Asset retirement obligation at January 29, 2011

  $ 5,606  

Additions

    206  

Change in assumptions

    (199 )

Settlements

    (61 )

Accretion expense

    323  
       

Asset retirement obligation at January 28, 2012

    5,875  

Additions

    89  

Change in assumptions

    (288 )

Settlements

    (11 )

Accretion expense

    298  
       

Asset retirement obligation at February 2, 2013

  $ 5,963  
       

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THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years ended February 2, 2013, January 28, 2012 and January 29, 2011

NOTE 8—INCOME TAXES

        The components of income from continuing operations before income taxes are as follows:

 
  Year Ended  
(dollar amounts in thousands)
  February 2,
2013
  January 28,
2012
  January 29,
2011
 

Domestic

  $ 14,577   $ 36,633   $ 52,319  

Foreign

    7,923     4,954     6,125  

Total

  $ 22,500   $ 41,588   $ 58,444  

        The provision for income taxes includes the following:

 
  Year Ended  
(dollar amounts in thousands)
  February 2,
2013
  January 28,
2012
  January 29,
2011
 

Current:

                   

Federal

  $ (338 ) $   $  

State

    471     602     491  

Foreign

    1,636     1,557     2,210  

Deferred:

                   

Federal(a)

    6,548     14,743     20,309  

State

    988     (3,887 )   (1,818 )

Foreign

    40     (555 )   81  
               

Total income tax expense from continuing operations(a)

  $ 9,345   $ 12,460   $ 21,273  
               

(a)
Excludes tax benefit recorded to discontinued operations of $0.2 million, $0.1 million and $0.3 million in fiscal years 2012, 2011 and 2010, respectively.

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THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years ended February 2, 2013, January 28, 2012 and January 29, 2011

NOTE 8—INCOME TAXES (Continued)

        A reconciliation of the statutory federal income tax rate to the effective rate for income tax expense follows:

 
  Year Ended  
 
  February 2,
2013
  January 28,
2012
  January 29,
2011
 

Statutory tax rate

    35.0 %   35.0 %   35.0 %

State income taxes, net of federal tax

    4.1     3.2     2.4  

Job credits

    (4.9 )   (1.5 )   (0.3 )

Hire credits

        (2.1 )    

Tax uncertainty adjustment

    (1.5 )   (0.1 )   0.2  

Valuation allowance

        (8.3 )   (3.5 )

Non deductible expenses

    2.2     2.0     0.5  

Stock compensation

    1.8     0.1     0.2  

Foreign taxes, net of federal tax

    5.6     1.7     2.4  

Other, net

    (0.8 )       (0.5 )
               

    41.5 %   30.0 %   36.4 %
               

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THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years ended February 2, 2013, January 28, 2012 and January 29, 2011

NOTE 8—INCOME TAXES (Continued)

        Items that gave rise to the deferred tax accounts are as follows:

(dollar amounts in thousands)
  February 2,
2013
  January 28,
2012
 

Deferred tax assets:

             

Employee compensation

  $ 5,274   $ 5,008  

Store closing reserves

    719     1,365  

Legal reserve

    122     341  

Benefit accruals

    1,247     5,922  

Net operating loss carryforwards—Federal

    1,887     16,473  

Net operating loss carryforwards—State

    111,785     111,588  

Tax credit carryforwards

    16,291     17,877  

Accrued leases

    16,032     15,916  

Interest rate derivatives

    708     5,730  

Deferred gain on sale leaseback

    51,124     56,325  

Deferred revenue

    5,194     5,621  

Other

    1,874     1,951  
           

Gross deferred tax assets

    212,257     244,117  

Valuation allowance

    (102,341 )   (103,915 )
           

    109,916     140,202  

Deferred tax liabilities:

             

Depreciation

  $ 42,400   $ 54,284  

Inventories

    65,203     65,886  

Real estate tax

    3,214     3,307  

Insurance and other

    6,261     6,159  

Debt related liabilities

    3,588     3,903  
           

    120,666     133,539  
           

Net deferred tax (liability) asset

  $ (10,750 ) $ 6,663  
           

        At February 2, 2013, the Company had available tax net operating losses that can be carried forward to future years. The Company has $1.9 million of deferred tax assets related to federal net operating loss carryforwards, which begin to expire in 2027. The Company has $2.3 million of deferred tax assets related to state tax net operating loss carryforwards in unitary filing jurisdictions, of which 2.9% will expire in the next five years and a full valuation allowance has been recorded against. The balance of $109.5 million of the Company's net operating loss carryforwards are for separate company state filing jurisdictions that will expire in various years beginning in 2013. $108.1 million of separate company state net operating losses are in the jurisdictions, where the Company has recorded a full valuation allowance against its net deferred tax assets.

        The tax credit carryforward at February 2, 2013 consists of $6.8 million of alternative minimum tax credits, $4.2 million of work opportunity credits, $0.9 million of hire tax credits and $4.4 million of various state credits. The alternative minimum tax credits have an indefinite life and the other credits are scheduled to expire in various years starting from 2013. The tax credit carryforward at January 28,

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THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years ended February 2, 2013, January 28, 2012 and January 29, 2011

NOTE 8—INCOME TAXES (Continued)

2012 consists of $7.3 million of alternative minimum tax credits, $4.0 million of work opportunity credits, $0.9 million of hire tax credits and $5.7 million of state and Puerto Rico tax credits. The alternative minimum credits have an indefinite life and the other credits are scheduled to expire in various years starting from 2012 of which $0.9 million have full valuation allowances recorded against them.

        The temporary differences between the book and tax treatment of income and expenses result in deferred tax assets and liabilities, which are included within the consolidated balance sheet. The Company must assess the likelihood that any recorded deferred tax assets will be recovered against future taxable income. To the extent the Company believes it is more likely than not that the asset will not be recoverable, a valuation allowance must be established. To the extent the Company establishes a valuation allowance or changes the allowance in a future period, income tax expense will be impacted. There was no significant change in the Company's valuation allowance position in fiscal year 2012. In fiscal year 2011, the Company released $5.3 million of gross valuation allowances ($3.6 million net of federal benefit) on certain state net operating loss carryforwards and state credits.

        The Company and its subsidiaries' largest jurisdictions where they are subject to income tax are U.S. federal, Puerto Rico and various states jurisdictions, in respective order of significance. The Company's U.S. federal returns for tax years 2009 and forward are subject to examination. State and local income tax returns are generally subject to examination for a period of three to five years after filing of the respective returns. The Company is currently under federal examination for fiscal year 2010 and has various state income tax returns in the process of examination.

        A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

(dollar amounts in thousands)
  February 2,
2013
  January 28,
2012
  January 29,
2011
 

Unrecognized tax benefit balance at the beginning of the year

  $ 3,364   $ 4,131   $ 2,411  

Gross increases for tax positions taken in prior years

            1,331  

Gross decreases for tax positions taken in prior years

    (338 )        

Gross increases for tax positions taken in current year

    201     235     389  

Settlements taken in current year

             

Lapse of statute of limitations

    (953 )   (1,002 )    
               

Unrecognized tax benefit balance at the end of the year

  $ 2,274   $ 3,364   $ 4,131  
               

        The Company recognizes potential interest and penalties for unrecognized tax benefits in income tax expense and, accordingly, the Company recognized $0.1 million in fiscal years 2012 and 2011 related to potential interest and penalties associated with uncertain tax positions. At February 2, 2013, January 28, 2012, and January 29, 2011, the Company has recorded $0.5 million, $0.3 million, and

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THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years ended February 2, 2013, January 28, 2012 and January 29, 2011

NOTE 8—INCOME TAXES (Continued)

$0.2 million, respectively, for the payment of interest and penalties which are excluded from the unrecognized tax benefit noted above.

        Unrecognized tax benefits include $0.9 million, $1.3 million, and $1.4 million, at February 2, 2013, January 28, 2012 and January 29, 2011, respectively, of tax benefits that, if recognized, would affect the Company's annual effective tax rate. The Company believes it is reasonably possible that the amount will increase or decrease within the next twelve months; however, it is not currently possible to estimate the impact of the change.

NOTE 9—STOCKHOLDERS' EQUITY

        On December 12, 2012, the Company's Board of Directors authorized a program to repurchase up to $50.0 million of the Company's common stock to be made from time to time in the open market or in privately negotiated transactions, with no expiration date. During the fourth quarter of fiscal 2012, the Company repurchased 35,000 shares of Common Stock for $342,000. All of these repurchased shares were placed into the Company's treasury.

NOTE 10—ACCUMULATED OTHER COMPREHENSIVE LOSS

        The components of accumulated other comprehensive loss are:

 
  Year Ended  
(dollar amounts in thousands)
  February 2,
2013
  January 28,
2012
  January 29,
2011
 

Defined benefit plan adjustment, net of tax

  $   $ (9,696 ) $ (6,576 )

Derivative financial instrument adjustment, net of tax

    (980 )   (7,953 )   (10,452 )
               

Accumulated other comprehensive loss

  $ (980 ) $ (17,649 ) $ (17,028 )
               

NOTE 11—STORE CLOSURES AND ASSET IMPAIRMENTS

        During fiscal 2012, the Company recorded a $10.6 million impairment charge related to 49 stores classified as held and used. Of the $10.6 million impairment charge, $5.1 million was charged to merchandise cost of sales, and $5.5 million was charged to service cost of sales. In fiscal 2011, the Company recorded a $1.6 million impairment charge related to 12 stores classified as held and used. Of the $1.6 million impairment charge, $0.6 million was charged to merchandise cost of sales, and $1.0 million was charged to service cost of sales. In both years the Company used a probability-weighted approach and estimates of expected future cash flows to determine the fair value of these stores. Discount and growth rate assumptions were derived from current economic conditions, management's expectations and projected trends of current operating results. The fair market value estimates are classified as a Level 2 or Level 3 measure within the fair value hierarchy. The remaining fair value of impaired assets was $2.3 million and $1.4 million at February 2, 2013 and January 28, 2012, respectively.

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THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years ended February 2, 2013, January 28, 2012 and January 29, 2011

NOTE 11—STORE CLOSURES AND ASSET IMPAIRMENTS (Continued)

        The following schedule details activity in the reserve for closed locations for the three years in the period ended February 2, 2013. The reserve balance includes remaining rent on leases net of sublease income.

(dollar amounts in thousands)
   
 

Balance, January 30, 2010

  $ 2,250  

Accretion of present value of liabilities

    81  

Change in assumptions about future sublease income, lease termination

    163  

Cash payments

    (1,253 )
       

Balance, January 29, 2011

    1,241  

Accretion of present value of liabilities

    53  

Provision for closed locations

    310  

Change in assumptions about future sublease income, lease termination

    674  

Cash payments

    (477 )
       

Balance, January 28, 2012

    1,801  

Accretion of present value of liabilities

    137  

Change in assumptions about future sublease income, lease termination

    367  

Cash payments

    (664 )
       

Balance, February 2, 2013

  $ 1,641  
       

        A store is classified as "held for disposal" when (i) the Company has committed to a plan to sell, (ii) the building is vacant and the property is available for sale, (iii) the Company is actively marketing the property for sale, (iv) the sale price is reasonable in relation to its current fair value and (v) the Company expects to complete the sale within one year. Assets held for disposal have been valued at the lower of their carrying amount or their estimated fair value, net of disposal costs. The fair value of these assets is estimated using readily available market data for comparable properties and is classified as a Level 2 (as described in Note 16, "Fair Value Measurements") measure within the fair value hierarchy. No depreciation expense is recognized during the period the asset is held for disposal. During fiscal 2012 and fiscal 2011, the Company had no stores classified as an asset held for sale.

        During fiscal 2010, the Company sold seven stores classified as held for disposal for $4.3 million and recorded a net gain of $0.5 million in earnings from continuing operations. In addition, during fiscal 2010, the Company recorded a $0.2 million impairment charge related to a store classified as held for disposal. The Company lowered its selling price reflecting declines in the commercial real estate market. Substantially all of this impairment was charged to merchandise cost of sales.

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THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years ended February 2, 2013, January 28, 2012 and January 29, 2011

NOTE 12—EARNINGS PER SHARE

        Basic earnings per share is based on net earnings divided by the weighted average number of shares outstanding during the period. The following schedule presents the calculation of basic and diluted earnings per share for earnings from continuing operations:

 
   
  Year Ended  
 
  (dollar amounts in thousands, except per share amounts)
  February 2,
2013
  January 28,
2012
  January 29,
2011
 

(a)

 

Earnings from continuing operations before discontinued operations

  $ 13,155   $ 29,128   $ 37,171  

 

Loss from discontinued operations, net of tax benefit of $(186), $(121) and $(291)

    (345 )   (225 )   (540 )
                   

 

Net earnings

  $ 12,810   $ 28,903   $ 36,631  
                   

(b)

 

Basic average number of common shares outstanding during period

    53,225     52,958     52,677  

 

Common shares assumed issued upon exercise of dilutive stock options, net of assumed repurchase, at the average market price

    729     673     485  
                   

(c)

 

Diluted average number of common shares assumed outstanding during period

    53,954     53,631     53,162  
                   

 

Basic earnings per share:

                   

 

Earnings from continuing operations (a/b)

  $ 0.25   $ 0.55   $ 0.71  

 

Discontinued operations, net of tax

    (0.01 )   (0.01 )   (0.01 )
                   

 

Basic earnings per share

  $ 0.24   $ 0.54   $ 0.70  
                   

 

Diluted earnings per share:

                   

 

Earnings from continuing operations (a/c)

  $ 0.24   $ 0.54   $ 0.70  

 

Discontinued operations, net of tax

            (0.01 )
                   

 

Diluted earnings per share

  $ 0.24   $ 0.54   $ 0.69  
                   

        Certain stock options were excluded from the calculations of diluted earnings per share because their exercise prices were greater than the average market price of the common shares for the period then ended and therefore would be anti-dilutive. The total number of such shares excluded from the diluted earnings per share calculation was 859,000, 870,000 and 978,000 as of February 2, 2013, January 28, 2012, and January 29, 2011, respectively.

NOTE 13—BENEFIT PLANS

DEFINED BENEFIT AND CONTRIBUTION PLANS

        The Company maintains a non-qualified defined contribution plan (the "Account Plan") for key employees designated by the Board of Directors. The Company's contribution expense for the Account Plan was $0.1 million, $0.3 million and $1.2 million for fiscal 2012, 2011 and 2010, respectively.

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THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years ended February 2, 2013, January 28, 2012 and January 29, 2011

NOTE 13—BENEFIT PLANS (Continued)

        The Company has a qualified 401(k) savings plan and a separate savings plan for employees residing in Puerto Rico, which cover all full-time employees who are at least 21 years of age with one or more years of service. The Company contributes the lesser of 50% of the first 6% of a participant's contributions or 3% of the participant's compensation under both savings plans. For fiscal 2012, 2011 and 2010, the Company's contributions were conditional upon the achievement of certain pre-established financial performance goals which were met in fiscal 2010, but not in fiscal 2012 or 2011. The Company's savings plans' contribution expense was $3.0 million in fiscal 2010.

        The Company also maintained a defined benefit pension plan (the "Plan") covering full-time employees hired on or before February 1, 1992. As of December 31, 1996, the Company froze the accrued benefits under the Plan and active participants became fully vested. During the third quarter of fiscal 2011, the Company began the process of terminating the Plan. During the fourth quarter of fiscal 2012, in accordance with Internal Revenue Service and Pension Benefit Guaranty Corporation requirements, the Company contributed $14.1 million to fully fund the Plan on a termination basis and recorded a $17.8 million settlement charge. The participants' benefits were converted into a lump sum cash payment or an annuity contract placed with an insurance carrier. The Company used a fiscal year end measurement date for determining the benefit obligation and the fair value of Plan assets. The actuarial computations were made using the "projected unit credit method." Variances between actual experience and assumptions for costs and returns on assets were amortized over the remaining service lives of employees under the Plan.

        Pension expense is as follows:

 
  Year Ended  
(dollar amounts in thousands)
  February 2,
2013
  January 28,
2012
  January 29,
2011
 

Service cost

  $   $   $  

Interest cost

    2,170     2,558     2,561  

Expected return on plan assets

    (2,658 )   (2,745 )   (2,151 )

Amortization of prior service cost

    13     14     14  

Recognized actuarial loss

    1,896     1,499     1,672  
               

Net Period Pension Cost

    1,421     1,326     2,096  

Settlement Charge

    17,753          
               

Net Period Pension Cost

  $ 19,174   $ 1,326   $ 2,096  
               

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THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years ended February 2, 2013, January 28, 2012 and January 29, 2011

NOTE 13—BENEFIT PLANS (Continued)

        The following actuarial assumptions were used to determine benefit obligation and pension expense:

 
  Year Ended  
 
  February 2,
2013
  January 28,
2012
  January 29,
2011
 

Benefit obligation assumptions:

                   

Discount rate

    N/A     4.60 %   5.70 %

Rate of compensation increase

    N/A     N/A     N/A  

Pension expense assumptions:

                   

Discount rate

    4.60 %   5.70 %   6.10 %

Expected return on plan assets

    6.80 %   6.80 %   6.95 %

Rate of compensation expense

    N/A     N/A     N/A  

        The Company selected the discount rate for the benefit obligation at January 28, 2012 to reflect a rate commensurate with a model bond portfolio with durations that match the expected payment patterns of the plans. To develop the expected long-term rate of return on assets assumption, the Company considered the historical returns and the future expectations for returns for each asset class, as well as the target asset allocation of the pension portfolio. This resulted in the selection of a long-term rate of return on assets of 6.80% for fiscal 2012 and fiscal 2011, and 6.95% for fiscal 2010.

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THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years ended February 2, 2013, January 28, 2012 and January 29, 2011

NOTE 13—BENEFIT PLANS (Continued)

        The following table sets forth the reconciliation of the benefit obligation, fair value of plan assets and funded status of the Company's defined benefit plans:

 
  Year ended  
(dollar amounts in thousands)
  February 2,
2013
  January 28,
2012
 

Change in benefit obligation:

             

Benefit obligation at beginning of year

  $ 53,974   $ 46,118  

Interest cost

    2,170     2,558  

Actuarial loss

    3,621     6,952  

Settlements paid

    (58,134 )    

Benefits paid

    (1,631 )   (1,654 )
           

Benefit obligation at end of year

  $   $ 53,974  
           

Change in plan assets:

             

Fair value of plan assets at beginning of year

  $ 43,602   $ 39,063  

Actual return on plan assets (net of expenses)

    2,050     3,193  

Employer contributions

    14,113     3,000  

Settlements paid

    (58,134 )    

Benefits paid

    (1,631 )   (1,654 )
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