Pep Boys Manny Moe & Jack 10Q 2007 Q3 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended October 28, 2006

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 No. 1-3381

The Pep Boys - Manny, Moe & Jack

(Exact name of registrant as specified in its charter)

Pennsylvania		23-0962915
(State or other jurisdiction of		(I.R.S. Employer ID number)
incorporation or organization)

3111 W. Allegheny Ave. Philadelphia, PA		19132
(Address of principal executive offices)		(Zip code)

215-430-9000

(Registrant’s telephone number, including area code)

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 and 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 x No o

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer x Non-accelerated filer o

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

As of November 24, 2006 there were 54,394,431 shares of the registrant’s Common Stock outstanding.

Index

PART I - FINANCIAL INFORMATION

Item 1.	Condensed Consolidated Financial Statements (Unaudited)	3

	Consolidated Balance Sheets – October 28, 2006 and January 28, 2006	3

	Consolidated Statements of Operations - Thirteen and Thirty-nine Weeks Ended October 28, 2006 and October 29, 2005	4

	Consolidated Statements of Cash Flows - Thirty-nine Weeks Ended October 28, 2006 and October 29, 2005	5

	Notes to Condensed Consolidated Financial Statements	6-21

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22-29

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	30

Item 4.	Controls and Procedures	30

PART II - OTHER INFORMATION		30

Item 1.	Legal Proceedings	30

Item 1A.	Risk Factors	31

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	31

Item 3.	Defaults Upon Senior Securities	31

Item 4.	Submission of Matters to a Vote of Security Holders	31

Item 5.	Other Information	31

Item 6.	Exhibits	31-32

SIGNATURES		33

INDEX TO EXHIBITS		34

PART I - - FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements (Unaudited)

THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(dollar amounts in thousands, except share data)

UNAUDITED

	October 28, 2006			Jan. 28, 2006*
ASSETS
Current Assets:
Cash and cash equivalents	$	22,492		$	48,281
Accounts receivable, net	29,488			36,434
Merchandise inventories	645,394			616,292
Prepaid expenses	25,151			40,952
Other	59,001			85,446
Assets held for disposal	—			652
Total Current Assets	781,526			828,057
Property and Equipment-at cost:
Land	256,865			257,802
Buildings and improvements	919,543			916,580
Furniture, fixtures and equipment	667,101			671,189
Construction in progress	17,896			15,858
	1,861,405			1,861,429
Less accumulated depreciation and amortization	952,867			914,040

Property and Equipment - Net	908,538			947,389
Other	79,547			46,307
Total Assets	$	1,769,611		$	1,821,753

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	308,683		$	261,940
Trade payable program liability	13,284			11,156
Accrued expenses	267,218			290,761
Deferred income taxes	18,909			15,417
Current maturities of long-term debt and obligations under capital leases	2,686			1,257
Total Current Liabilities	610,780			580,531
Long-term debt and obligations under capital leases, less current maturities	524,426			467,239
Convertible long-term debt	—			119,000
Other long-term liabilities	58,762			57,481
Deferred income taxes	—			2,937
Commitments and Contingencies
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	289,718			288,098
Retained earnings	460,013			481,926
Accumulated other comprehensive loss	(4,209		)	(3,565		)
Less cost of shares in treasury - 12,015,192 shares and 12,152,968 shares	(179,172		)	(181,187		)
Less cost of shares in benefits trust - 2,195,270 shares	(59,264		)	(59,264		)
Total Stockholders’ Equity	575,643			594,565
Total Liabilities and Stockholders’ Equity	$	1,769,611		$	1,821,753

See notes to condensed consolidated financial statements.

THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(dollar amounts in thousands, except per share amounts)

UNAUDITED

	Thirteen Weeks Ended						Thirty-nine Weeks Ended
	October 28, 2006			October 29, 2005			October 28, 2006			October 29, 2005
	Amount			Amount			Amount			Amount
Merchandise Sales	$	453,711		$	452,356		$	1,393,023		$	1,396,812
Service Revenue	97,138			93,548			292,992			290,736
Total Revenues	550,849			545,904			1,686,015			1,687,548
Costs of Merchandise Sales	323,025			337,899			995,447			1,031,113
Costs of Service Revenue	90,131			88,892			268,895			259,580
Total Costs of Revenues	413,156			426,791			1,264,342			1,290,693
Gross Profit from Merchandise Sales	130,686			114,457			397,576			365,699
Gross Profit from Service Revenue	7,007			4,656			24,097			31,156
Total Gross Profit	137,693			119,113			421,673			396,855
Selling, General and Administrative Expenses	139,255			127,037			410,020			395,367
Net Gain (Loss) from Sales of Assets	213			(629		)	6,229			2,977
Operating (Loss) Profit	(1,349		)	(8,553		)	17,882			4,465
Non-operating Income	1,017			526			5,294			2,747
Interest Expense	15,581			9,205			37,886			27,354
Loss From Continuing Operations Before Income Taxes and Cumulative Effect of Change in Accounting Principle	(15,913		)	(17,232		)	(14,710		)	(20,142		)
Income Tax Benefit	(5,200		)	(5,856		)	(4,600		)	(7,212		)
Net Loss from Continuing Operations Before Cumulative Effect of Change in Accounting Principle	(10,713		)	(11,376		)	(10,110		)	(12,930		)

Discontinued Operations, Net of Tax	(205		)	180			(338		)	3
Cumulative Effect of Change in Accounting Principle, Net of Tax	4			—			183			—
Net Loss	(10,914		)	(11,196		)	(10,265		)	(12,927		)
Retained Earnings, beginning of period	474,858			525,703			481,926			536,780
Cash Dividends	(3,691		)	(3,664		)	(11,207		)	(10,984		)
Effect of Stock Options	(209		)	(257		)	(285		)	(2,231		)
Dividend Reinvestment Plan	(31		)	(54		)	(156		)	(106		)
Retained Earnings, end of period	$	460,013		$	510,532		$	460,013		$	510,532
Basic and Diluted Loss per Share:
Basic and Diluted Weighted Average Shares Outstanding	54,313			54,774			54,264			55,288
Net Loss From Continuing Operations Before Cumulative Effect of Change in Accounting Principle	$	(0.20	)	$	(0.21	)	$	(0.19	)	$	(0.23	)
Discontinued Operations, Net of Tax	—			0.01			—			—
Cumulative Effect of Change in Accounting Principle, Net of Tax	—			—			—			—
Basic and Diluted Loss Per Share	$	(0.20	)	$	(0.20	)	$	(0.19	)	$	(0.23	)
Cash Dividends Per Share	$	0.0675		$	0.0675		$	0.1350		$	0.1350

See notes to condensed consolidated financial statements.

THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollar amounts in thousands)

UNAUDITED

Thirty-nine Weeks Ended	October 28, 2006			October 29, 2005
Cash Flows from Operating Activities:
Net loss	$	(10,265	)	$	(12,927	)
Adjustments to Reconcile Net Loss to Net Cash Provided by Continuing Operations:
Net loss (gain) from discontinued operations	338			(3		)
Depreciation and amortization	62,546			59,283
Cumulative effect of change in accounting principle, net of tax	(183		)	—
Accretion of asset disposal obligation	203			84
Loss on defeasance of convertible debt	755			—
Stock compensation expense	2,611			2,001
Cancellation of vested stock options	(1,056		)	—
Deferred income taxes	(7,366		)	(12,337		)
Gain from sales of assets	(6,229		)	(2,977		)
Loss from asset impairment	550			—
Excess tax benefits from stock based awards	(37		)	—
Increase in cash surrender value of life insurance policies	(1,593		)	(2,575		)
Changes in Operating Assets and Liabilities:
Decrease in accounts receivable, prepaid expenses and other	50,150			51,789
Increase in merchandise inventories	(29,102		)	(45,608		)
Increase (decrease) in accounts payable	46,743			(6,861		)
Decrease in accrued expenses	(24,998		)	(44,075		)
Increase in other long-term liabilities	1,281			14,918
Net cash provided by continuing operations	84,348			712
Net cash used in discontinued operations	(367		)	(259		)
Net Cash Provided by Operating Activities	83,981			453

Cash Flows from Investing Activities:
Cash paid for property and equipment	(25,092		)	(65,197		)
Proceeds from sales of assets	1,598			1,724
Proceeds from sales of assets held for disposal	6,981			6,913
Repayment of life insurance proceeds	(24,669		)	—
Premiums paid on life insurance policies	—			(488		)
Net cash used in continuing operations	(41,182		)	(57,048		)
Net cash provided by discontinued operations	—			916
Net Cash Used in Investing Activities	(41,182		)	(56,132		)

Cash Flows from Financing Activities:
Net (payments) borrowings under line of credit agreements	(60,042		)	62,163
Excess tax benefits from stock based awards	37			—
Net borrowings on trade payable program liability	2,128			11,212
Proceeds from term loan	121,000			—
Repayment of long-term debt	(2,259		)	(40,456		)
Defeasance of convertible-debt	(119,000		)	—
Payments on capital lease obligations	(167		)	(363		)
Dividends paid	(11,207		)	(10,984		)
Repurchase of common stock	—			(15,562		)
Proceeds from exercise of stock options	242			2,711
Proceeds from dividend reinvestment plan	680			734
Net Cash (Used in) Provided by Financing Activities	(68,588		)	9,455
Net Decrease in Cash and Cash Equivalents	(25,789		)	(46,224		)
Cash and Cash Equivalents at Beginning of Period	48,281			82,758
Cash and Cash Equivalents at End of Period	$	22,492		$	36,534

Supplemental Disclosure of Cash Flow Information
Cash paid for interest, net of amounts capitalized	$	34,246		$	19,491
Cash paid for income taxes	$	730		$	—
Cash received from income tax refunds	$	—		$	8,605
Non-cash investing activities:
Accrued purchases of property and equipment	$	757		$	2,182
Non-cash financing activities:
Equipment capital leases	$	84		$	124

See notes to condensed consolidated financial statements.

THE PEP BOYS - MANNY, MOE & JACK AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. Condensed Consolidated Financial Statements

The consolidated balance sheet as of October 28, 2006, the consolidated statements of operations for the thirteen and thirty-nine weeks ended October 28, 2006 and October 29, 2005 and the consolidated statements of cash flows for the thirty-nine weeks ended October 28, 2006 and October 29, 2005 are unaudited. In the opinion of management, all adjustments necessary to present fairly the financial position, results of operations and cash flows at October 28, 2006 and for all periods presented have been made.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted, as permitted by Rule 10-01 of the Security and Exchange Commission’s (SEC) Regulation S-X, “Interim Financial Statements”. It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 28, 2006 (fiscal 2005). The results of operations for the thirteen and thirty-nine weeks ended October 28, 2006 are not necessarily indicative of the operating results for the full year.

The statements of operations for the thirteen and thirty-nine weeks ended October 29, 2005 have been reclassified to present Net Gain from Sales of Assets as a separate line item. For the thirteen and thirty-nine weeks ended October 29, 2005, the primary impact of the reclassification was a decrease of approximately $629,000 and an increase of approximately $2,977,000, respectively, to both Costs of Merchandise Sales and Total Costs of Revenues, with a corresponding decrease to both Gross Profit from Merchandise Sales and Total Gross Profit.

Certain reclassifications regarding discontinued operations have also been made to the prior year’s consolidated financial statements to conform to the current year’s presentation — See Note 6.

NOTE 2. New Accounting Standards

In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (SFAS No. 123R) requiring that the compensation cost relating to share-based payment transactions be recognized in financial statements. The Company adopted SFAS No. 123R on January 29, 2006 using the modified prospective method. The impact of adopting this Standard is discussed in Note 3.

In June of 2006, the FASB ratified the consensus reached by the Emerging Issues Task Force on Issue 06-3, How Taxes Collected from Customers and Remitted to Governmental Authorities Should be Presented in the Income Statement (That Is, Gross versus Net Presentation). The scope of this consensus includes any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer and may include, but is not limited to sales, use, value added and some excise taxes. Additionally, this consensus seeks to address how a company should address the disclosure of such items in interim and annual financial statements, either gross or net pursuant to APB Opinion No. 22, Disclosure of Accounting Policies. The Company is required to adopt this statement in fiscal 2007. The Company presents sales net of sales taxes in its consolidated statement of operations and does not anticipate changing its policy as a result of EITF 06-3.

In July of 2006, the FASB released FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement 109 (FIN 48). FIN 48 prescribes a model for the recognition and measurement of a tax position taken or expected to be taken in a tax return, and provides guidance on derecognition, classification, interest and penalties, disclosure and transition. The Company is required to adopt this Interpretation in fiscal 2007, and is currently evaluating the effect that this Interpretation will have on its consolidated financial statements.

In September 2006, the SEC issued Staff Accounting Bulletin No. 108 (SAB 108). SAB 108 provides interpretive guidance on the consideration of the effects of prior year misstatements in quantifying current year financial statement misstatements for the purpose of a materiality assessment. The Company will be required to adopt the provisions of SAB 108 in its first year ending after November 15, 2006. The Company does not expect the adoption of this statement to have a material impact on its consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS 157). SFAS 157 defines the term fair value, establishes a framework for measuring it within generally accepted accounting principles and expands disclosures about its measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after

November 15, 2007. The Company does not expect the adoption of this statement to have a material impact on its consolidated financial statements.

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans- an Amendment of FASB Statements No. 87, 88, 106 and 132(R)” (SFAS 158). SFAS 158 requires entities to recognize the overfunded or underfunded status of its defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in such funded status in the year in which the changes occur through comprehensive income. Additionally, an entity’s defined benefit plan assets and obligations must be measured as of the date of the entity’s fiscal year end statement of financial position (with limited exception). The funded status requirement under SFAS 158 is effective for financial statements issued for fiscal years ending after December 15, 2006, while the measurement date requirement is effective as of the date of the entity’s fiscal year-end statement of financial position for fiscal years ending after December 15, 2008. Upon adoption the Company expects to reduce comprehensive income on its February 3, 2007 consolidated statement of financial position by the elimination of a prepaid intangible asset and the creation of an additional liability.

NOTE 3. Accounting for Stock-Based Compensation

The Company has a stock-based compensation plan originally approved by the stockholders on May 21, 1990 under which it has previously granted non-qualified stock options and incentive stock options to key employees and members of its Board of Directors. As of October 28, 2006, there were no awards remaining available for grant under the 1990 Plan. The Company has a stock-based compensation plan originally approved by the stockholders on June 2, 1999 under which it has previously granted and may continue to grant non-qualified stock options, incentive stock options and restricted stock units (RSUs) to key employees and members of its Board of Directors. As of October 28, 2006, there were 1,635,387 awards remaining available for grant under the 1999 Plan.

Incentive stock options and non-qualified stock options previously granted under the plans (i) to non-officers, vest fully on the third anniversary of their grant date and (ii) to officers, vest over a four-year period, with one-fifth vesting on each of the grant date and the next four anniversaries thereof. Generally, options granted prior to March 3, 2004 carry an expiration date of ten years and options granted on or after March 3, 2004 carry an expiration date of seven years.

RSUs previously granted to non-officers vest fully on the third anniversary of their grant date. RSUs previously granted to officers (i) on or prior to January 28, 2006, generally vest over a four-year period with one-fifth vesting on each of the grant date and the next four anniversaries thereof and (ii) after January 28, 2006, generally vest over a four-year period with one-fourth vesting on each of the first four anniversaries of the grant date.

The Company has also granted RSUs under the 1999 plan in conjunction with its non-qualified deferred compensation plan. Under the deferred compensation plan, the first 20% of an officer’s bonus deferred into the Company’s stock fund is matched by the Company on a one-for-one basis with RSUs that vest over a three-year period, with one third vesting on each of the first three anniversaries of the grant date.

The exercise price, term and other conditions applicable to future stock option and RSU grants under the 1999 plan are generally determined by the Board of Directors; provided that the exercise price of stock options must be at least 100% of the quoted market price of the common stock on the grant date. The Company currently satisfies share requirements resulting from RSU conversions and option exercises from its Treasury. The Company believes its Treasury share balance at October 28, 2006 is adequate to satisfy such activity during the next twelve-month period.

Effective January 29, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (SFAS No.123R) requiring that compensation cost relating to share-based payment transactions be 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). Prior to January 29, 2006, the Company accounted for share-based compensation to employees in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB No. 25), and related interpretations. The Company also followed the disclosure requirements of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation”. The Company adopted SFAS No. 123R using the modified prospective method and, accordingly, financial statement amounts for prior periods presented in this Form 10-Q have not been restated to reflect the fair value method of recognizing compensation cost relating to share-based compensation.

SFAS No. 123R also requires the Company to change the classification, in its consolidated statement of cash flows, of any tax benefits realized upon the exercise of stock options or issuance of RSUs in excess of that which is associated with the expense recognized for financial reporting purposes. These amounts, approximately $4,000 and $37,000 for the thirteen and thirty-nine weeks ended October 28, 2006, respectively, are presented as a financing cash inflow rather than as a reduction of

income taxes paid in the Company’s consolidated statement of cash flows.

The Company recognized approximately $344,000 and $1,267,000 of compensation expense related to stock options, and approximately $549,000 and $1,344,000 of compensation expense related to RSUs, in its operating results (included in selling, general and administrative expenses) in the thirteen and thirty-nine weeks ended October 28, 2006, respectively. For the thirteen weeks ended October 28, 2006, the adoption of the fair value method of SFAS No. 123R resulted in additional share-based compensation expense and a corresponding reduction of pre-tax income of approximately $344,000 and a reduction in net income of approximately $234,000. For the thirty-nine weeks ended October 28, 2006, the adoption of the fair value method of SFAS No. 123R resulted in additional share-based compensation expense and a corresponding reduction of pre-tax income of approximately $1,267,000, and a reduction in net income of approximately $888,000. The associated deferred tax benefit recognized was $184,000 and $66,000 in the thirteen and thirty-nine weeks ended October 28, 2006, respectively. Compensation expense for RSUs recognized before implementation of SFAS No. 123R for the thirteen and thirty-nine weeks ended October 29, 2005 was $598,000 and $2,001,000, respectively, and was included in selling, general and administrative expenses. As of October 28, 2006 the cumulative effect resulting from the initial application of the provisions of SFAS No. 123R to RSUs was approximately $183,000, net of tax.

The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model. Expected volatility is based on historical volatilities for a time period similar to that of the expected term. In estimating the expected term of the options, the Company has utilized the “simplified method” allowable under SEC Staff Accounting Bulletin No. 107, Share-Based Payment. The risk-free rate is based on the U.S. treasury yield curve for issues with a remaining term equal to the expected term.

The following table sets forth the assumptions used to determine compensation cost for our stock options consistent with the requirements of SFAS No. 123R:

Under APB No. 25 there was no compensation cost recognized for the Company’s stock options awarded in the thirteen and thirty-nine weeks ended October 29, 2005 as these stock options had an exercise price equal to the market value of the underlying stock at the grant date. The following table sets forth pro forma information as if compensation cost had been determined consistent with the requirements of SFAS No. 123:

(dollar amounts in thousands, except share data)	Thirteen Weeks Ended October 29, 2005			Thirty-nine Weeks Ended October 29, 2005

Net loss, as reported	$	(11,196	)	$	(12,927	)

Add: Total stock-based compensation for RSUs, net of tax	395			1,285
Deduct: Total stock-based employee compensation cost determined under the fair value method, net of tax	(877		)	(2,646		)

Pro forma net loss	$	(11,678	)	$	(14,288	)

Loss per share:
Basic and diluted—as reported	$	(0.20	)	$	(0.23	)
Basic and diluted—pro forma	$	(0.21	)	$	(0.26	)

The following sets forth fair value per share information, including related assumptions, used to determine compensation cost consistent with the requirements of SFAS No. 123:

	Thirty-nine Weeks Ended October 29, 2005

Assumptions:
Expected annual dividend yield	1.77	%
Expected volatility	46.0	%
Risk-free interest rate range:
high	4.4	%
low	3.5	%
Ranges of expected lives (in years)	3-8

The following table summarizes information about stock option activity for the thirty-nine weeks ended October 28, 2006:

	Number of Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (years)	Aggregate Intrinsic Value

Outstanding at January 28, 2006	4,537,155		$	15.87	4.7
Granted	61,977		15.01
Exercised	(32,550	)	7.43
Forfeited	(323,298	)	13.29
Expired	(1,040,702	)	13.11

Outstanding at October 28, 2006	3,202,582		$	17.07	3.2	$	3,587,467

Exercisable at October 28, 2006	2,925,820		$	17.18	2.9	$	3,377,117

The weighted average fair values of options granted during the thirteen and thirty-nine weeks ended October 28, 2006 and October 29, 2005 were $13.60 and $10.04, and $-0- and $7.66, respectively. The total intrinsic value of options (which is the amount by which the stock price exceeded the exercise price of the options on the date of exercise) exercised during the thirteen and thirty-nine weeks ended October 28, 2006 and October 29, 2005 was approximately $75,000 and $144,000, and $155,000 and $2,317,000, respectively. During the thirteen and thirty-nine weeks ended October 28, 2006, the amount of cash received from the exercise of stock options was $186,000 and $242,000, respectively, resulting in tax benefits of $29,000 and $55,000, respectively.

At October 28, 2006, there was approximately $1,564,000 of total unrecognized pre-tax compensation cost related to non-vested stock options, which is expected to be recognized over a weighted-average period of 2.45 years. The total fair values of stock options vested during the thirteen and thirty-nine weeks ended October 28, 2006 and October 29, 2005 were approximately $426,000 and $2,401,000, and $363,000 and $4,928,000, respectively.

The following table summarizes information about activity related to non-vested stock awards (RSUs) as of October 28, 2006 and changes for the thirty-nine weeks ended October 28, 2006:

	Number of RSUs		Weighted Average Grant Date Fair Value

Non-vested at January 28, 2006	265,815		$	18.41
Granted	221,161		12.60
Vested	(77,800	)	18.25
Forfeited	(17,315	)	17.05
Non-vested at October 28, 2006	391,861		14.16

At October 28, 2006, there was approximately $4,097,000 of total unrecognized pre-tax compensation cost related to non-vested RSUs, which is expected to be recognized over a weighted-average period of 1.7 years. The total fair values of RSUs vested during the thirteen and thirty-nine weeks ended October 28, 2006and October 29, 2005 were approximately $59,000 and $1,420,000, and $63,000 and $792,000, respectively. The total intrinsic values of RSUs converted during the thirteen and thirty-nine weeks ended October 28, 2006 and October 29, 2005 were approximately $-0- and $1,499,000, and $68,000 and $852,000, respectively. During the thirteen and thirty-nine weeks ended October 28, 2006, the tax benefits realized for converted RSUs were $-0- and $288,000, respectively. The grant date weighted average fair values for RSUs granted during the thirteen and thirty-nine weeks ended October 29, 2005 were $11.16 and $14.92, respectively.

NOTE 4. 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. An actual valuation of inventory under the LIFO method can be made only at the end of each fiscal year based on inventory and costs at that time. Accordingly, interim LIFO calculations must be based on management’s estimates of expected fiscal year-end inventory levels and costs. If the first-in, first-out (FIFO) method of costing inventory had been used by the Company, inventory would have been $637,195,814 and $615,698,000 as of October 28, 2006 and January 28, 2006, respectively.

The Company also establishes reserves for potentially excess and obsolete inventories based on current inventory levels, the historical analysis of product sales and current market conditions. The nature of the Company’s inventory is such that the risk of obsolescence is minimal and excess inventory has historically been returned to the Company’s vendors for credit. The Company provides reserves when less than full credit is expected from a vendor or when market is lower than recorded costs. The reserves are revised, if necessary, on a quarterly basis for adequacy. The Company’s reserves against inventory for these matters were $13,322,000 and $12,822,000 at October 28, 2006 and January 28, 2006, respectively.

NOTE 5. Other Current Assets

The Company’s other current assets as of October 28, 2006 and January 28, 2006 were as follows:

(dollar amounts in thousands)	October 28, 2006		Jan. 28, 2006

Reinsurance receivable	$	57,446	$	82,629
Income taxes receivable	631		2,694
Other	924		123
Total	$	59,001	$	85,446

NOTE 6. Discontinued Operations

In accordance with SFAS No. 144, discontinued operations has reflected the ongoing costs associated with eleven stores remaining on October 28, 2006 from 33 stores closed on July 31, 2003 as part of a corporate restructuring.

Below is a summary of these stores’ operations for the thirteen and thirty-nine weeks ended October 28, 2006 and October 29, 2005.

	Thirteen Weeks Ended					Thirty-nine Weeks Ended
(dollar amounts in thousands)	October 28, 2006			October 29, 2005		October 28, 2006			October 29, 2005
(Loss) gain from discontinued operations, before income taxes	$	(297	)	$	337	$	(496	)	$	4

Additionally, the Company has classified certain assets as assets held for disposal on its balance sheets. As of October 28, 2006 and January 28, 2006 the net book values of these assets were as follows:

(dollar amounts in thousands)	October 28, 2006		January 28, 2006
Land	$	—	$	120
Buildings and improvements	—		532
Equipment	—		—
	$	—	$	652

Store Transfers

During the second quarter of fiscal 2006, the Company sold a store that it has leased back and will continue to operate for a one year period. Due to its significant continuing involvement with this store following the sale, the Company reclassified into continuing operations, for all periods presented, this store’s revenues and costs that had been previously classified into discontinued operations during the third quarter of fiscal 2005, in accordance with SFAS No. 144 and EITF No. 03-13.

During the first quarter of 2006, the Company reclassified a store, closed in October 2000, from assets held for use to assets held for disposal in accordance with the provisions of SFAS No. 144. The Company anticipates disposing of it within one year.

NOTE 7. Pension and Savings Plan

Pension expense includes the following:

	Thirteen Weeks Ended						Thirty-nine Weeks Ended
(dollar amounts in thousands)	October 28, 2006			October 29, 2005			October 28, 2006			October 29, 2005

Service cost	$	58		$	91		$	188		$	273
Interest cost	772			753			2,300			2,259
Expected return on plan assets	(532		)	(587		)	(1,645		)	(1,761		)
Amortization of transition obligation	41			41			122			123
Amortization of prior service cost	91			91			269			273
Amortization of net loss	602			545			1,733			1,635
Net periodic benefit cost	$	1,032		$	934		$	2,967		$	2,802

The Company originally expected to contribute approximately $1,417,000 to its pension plan in fiscal 2006. As of October 28, 2006, $228,000 of such contributions had been made. The Company has revised its expectations during fiscal 2006 and now expects total contributions for fiscal 2006 to be approximately $515,000.

The Company has two 401(k) savings plans, 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. The Company’s savings plans’ contribution expense was approximately $359,000 and $544,000 for the thirteen weeks ended October 28, 2006 and October 29, 2005, respectively, and $2,110,000 and $2,338,000 for the thirty-nine weeks ended October 28, 2006 and October 29, 2005, respectively. On January 31, 2004, the Company amended and restated its Executive Supplemental Retirement Plan (SERP). This amendment converted the defined benefit plan to a defined contribution plan for certain unvested participants and all future participants. All vested participants continue to accrue benefits according to the previous defined benefit formula. The Company’s contribution expense for the defined contribution portion of the plan was approximately $(9,000) and $12,000 for the thirteen weeks ended October 28, 2006 and October 29, 2005, respectively, and $479,000 and $448,000 for the thirty-nine weeks ended October 28, 2006 and October 29, 2005, respectively.

NOTE 8. Advertising Expense

The Company expenses the production costs of advertising the first time the advertising takes place. Gross advertising expense was $18,611,000 and $18,561,000 for the thirteen weeks ended October 28, 2006 and October 29, 2005, respectively, and $62,706,000 and $65,588,000 for the thirty-nine weeks ended October 28, 2006 and October 29, 2005, respectively. No advertising costs were recorded as assets as of October 28, 2006 or January 28, 2006.

Prior to the first quarter of fiscal 2006, the Company received funds from vendors for cooperative advertising. Certain cooperative advertising reimbursements were netted against specific, incremental, identifiable costs incurred in connection with the selling of the vendor’s product. Cooperative advertising reimbursements of $7,510,000 and $26,929,000 for the thirteen and thirty-nine weeks ended October 29, 2005, respectively, were recorded as a reduction of advertising expense with the net amount included in selling, general and administrative expenses in the consolidated statement of operations. Any excess reimbursements over these costs were characterized as a reduction of inventory and were recognized as a reduction of cost of sales as the inventories were sold, in accordance with EITF No. 02-16. The amount of excess reimbursements recognized as a reduction of costs of sales was $12,362,000 and $33,364,000 for the thirteen and the thirty-nine weeks ended October 29, 2005, respectively.

The Company has restructured substantially all of its vendor agreements, effective January 29, 2006, to provide flexibility in how it can use vendor support funds, and eliminate the administrative burden associated with tracking the application of such funds. Accordingly, in the thirty-nine weeks ended October 28, 2006, all vendor support funds were treated as a reduction of inventories and were recognized as a reduction to cost of sales as inventories were subsequently sold.

NOTE 9. Debt and Financing Arrangements

On October 27, 2006, the Company amended and restated its Senior Secured Term Loan Facility dated January 27, 2006. The amendment increased the size of the facility from $200,000,000 to $320,000,000, extended its maturity from January 27, 2011 to October 27, 2013 and reduced its interest rate from London Interbank Offered Rate (LIBOR) plus 3.00% to LIBOR plus 2.75%. The interest rate can be further reduced to LIBOR plus 2.50% upon achieving a specified leverage ratio. Accordingly, the number of the Company’s stores included in the collateral pool securing the facility increased from 154 to 241.

Proceeds from the facility were used to satisfy and discharge the Company’s outstanding $119,000,000 4.25% Convertible Senior Notes due June 1, 2007 by deposit into an escrow fund with an independent trustee. The right of the holders of the convertible notes to convert them into shares of the Company’s common stock, at any time until the June 1, 2007 maturity date, survives such satisfaction and discharge. The conversion price is $22.40 per share. The Company recorded a non-cash charge for the value of such conversion right, approximately $755,000 as determined by the Black-Scholes method, in its consolidated statement of operations for the thirteen and thirty-nine weeks ended October 28, 2006.

NOTE 10. 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 warranties are covered in full by the Company on a limited lifetime basis. The Company establishes its warranty reserves based on historical data of warranty transactions.

Components of the reserve for warranty costs for the thirty-nine week periods ending October 28, 2006 and October 29, 2005 are as follows:

(dollar amounts in thousands)	Thirty-nine Weeks Ended October 28, 2006			Thirty-nine Weeks Ended October 29, 2005

Beginning balance	$	1,477		$	1,324

Additions related to current period sales	15,751			16,056

Warranty costs incurred in current period	(15,824		)	(15,795		)
Ending balance	$	1,404		$	1,585

NOTE 11. Net Earnings Per Share

At October 28, 2006 and October 29, 2005 there were 3,203,000 and 4,648,000 outstanding options to purchase shares of the Company’s common stock, respectively. Certain stock options were excluded from the calculation of diluted earnings per share because their exercise prices were greater than the average market price of the common shares for the periods then ended. The total numbers of such shares excluded from the diluted earnings per share calculation are 2,757,000 and 3,175,000 for the thirteen weeks ended October 28,2006 and October 29, 2005, respectively. The total numbers of such shares excluded from the diluted earnings per share calculation are 2,895,000 and 3,218,000 for the thirty-nine weeks ended October 28, 2006 and October 29, 2005, respectively.

NOTE 12. Supplemental Guarantor Information

On December 14, 2004, the Company issued $200,000,000 aggregate principal amount of 7.50% Senior Subordinated Notes due December 15, 2014, and on October 27, 2006 the Company expanded its outstanding Senior Secured Term Loan facility from $199,000,000 to $320,000,000 bearing interest of LIBOR plus 2.75% due October 27, 2013. Both issuances are jointly and severally and fully and unconditionally guaranteed by the Company’s 100% owned direct and indirect operating subsidiaries, The Pep Boys Manny, Moe & Jack of California, Pep Boys - Manny, Moe & Jack of Delaware, Inc. and Pep Boys - Manny, Moe & Jack of Puerto Rico, Inc. The Senior Subordinated Notes are unsecured.

During the third quarter of fiscal 2006 certain assets have been sold at a price of $34,000,000 from Pep Boys to the non-guarantor subsidiary.

The following are consolidating balance sheets of the Company as of October 28, 2006 and January 28, 2006 and the related consolidating statements of operations for the thirteen and thirty-nine weeks ended October 28, 2006 and October 29, 2005 and condensed consolidating statements of cash flows for the thirty-nine weeks ended October 28, 2006 and October 29, 2005.

CONDENSED CONSOLIDATING BALANCE SHEET

(dollar amounts in thousands)

(unaudited)

							Subsidiary
				Subsidiary			Non-			Consolidation/
October 28, 2006	Pep Boys			Guarantors			Guarantors			Elimination			Consolidated

ASSETS
Current Assets:
Cash and cash equivalents	$	12,898		$	7,794		$	1,800		$	—		$	22,492
Accounts receivable, net	14,377			15,111			—			—			29,488
Merchandise inventories	220,213			425,181			—			—			645,394
Prepaid expenses	21,266			8,921			3,488			(8,524		)	25,151
Other	(580		)	2,252			56,964			—			59,001
Assets held for disposal	—			—			—			—			—
Total Current Assets	268,174			459,259			62,252			(8,524		)	781,527
Property and Equipment - at cost:
Land	79,677			170,757			12,893			(6,462		)	256,865
Buildings and improvements	307,552			601,693			20,937			(10,638		)	919,543
Furniture, fixtures and equipment	281,785			385,316			—			—			667,101
Construction in progress	16,821			1,075			—			—			17,896
	685,835			1,158,841			33,830			(17,101		)	1,861,405
Less accumulated depreciation and amortization	378,226			571,172			—			3,469			952,867
Property and Equipment - Net	307,609			587,669			33,830			(20,570		)	908,538

Investment in subsidiaries	1,594,339			1,387,577			—			(2,981,916		)	—

Intercompany receivable	—			692,865			106,155			(799,020		)	—

Other	80,864			(1,317		)	—			—			79,547
Total Assets	$	2,251,351		$	3,126,053		$	202,237		$	(3,810,030	)	$	1,769,611
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	308,674		$	9		$	—		$	—		$	308,683
Trade payable program liability	13,284			—			—			—			13,284
Accrued expenses	36,014			103,309			158,775			(30,880		)	267,218
Deferred income taxes	(50		)	24,699			(5,740		)	—			18,909
Current maturities of long-term debt and obligations under capital leases	2,686			—			—			—			2,686
Total Current Liabilities	360,608			128,017			153,035			(30,880		)	610,780
Long-term debt and obligations under capital leases, less current maturities	520,411			4,015			—			—			524,426
Convertible long-term debt	—			—			—			—			—
Other long-term liabilities	29,499			27,475			—			1,788			58,762
Intercompany liabilities	765,190			—			33,830			(799,020		)	—
Stockholders’ Equity:
Common stock	68,557			1,502			100			(1,602		)	68,557
Additional paid-in capital	289,718			436,858			3,900			(440,758		)	289,718
Retained earnings	460,013			2,528,186			11,372			(2,539,558		)	460,013
Accumulated other comprehensive loss	(4,209		)	—			—			—			(4,209		)
Less:
Cost of shares in treasury	(179,172		)	—			—			—			(179,172		)
Cost of shares in benefits trust	(59,264		)	—			—			—			(59,264		)
Total Stockholders’ Equity	575,643			2,966,546			15,372			(2,981,918		)	575,643
Total Liabilities and Stockholders’ Equity	$	2,251,351		$	3,126,053		$	202,237		$	(3,810,030	)	$	1,769,611

CONDENSED CONSOLIDATING BALANCE SHEET

(dollar amounts in thousands)

(unaudited)

							Subsidiary
				Subsidiary			Non-			Consolidation/
January 28, 2006	Pep Boys			Guarantors			Guarantors			Elimination			Consolidated

ASSETS
Current Assets:
Cash and cash equivalents	$	12,019		$	6,953		$	29,309		$	—		$	48,281
Accounts receivable, net	20,030			16,404			—			—			36,434
Merchandise inventories	209,384			406,908			—			—			616,292
Prepaid expenses	33,765			9,678			19,000			(21,491		)	40,952
Other	6,116			8,960			70,370			—			85,446
Assets held for disposal	—			652			—			—			652
Total Current Assets	281,314			449,555			118,679			(21,491		)	828,057
Property and Equipment - at cost:
Land	86,805			170,997			—			—			257,802
Buildings and improvements	316,725			599,855			—			—			916,580
Furniture, fixtures and equipment	278,742			392,447			—			—			671,189
Construction in progress	15,261			597			—			—			15,858
	697,533			1,163,896			—			—			1,861,429
Less accumulated depreciation and amortization	364,793			549,247			—			—			914,040
Property and Equipment - Net	332,740			614,649			—			—			947,389
Investment in subsidiaries	1,520,208			1,290,063			—			(2,810,271		)	—
Intercompany receivable	—			631,061			84,563			(715,624		)	—
Other	42,144			3,723			—			440			46,307
Total Assets	$	2,176,406		$	2,989,051		$	203,242		$	(3,546,946	)	$	1,821,753
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	261,931		$	9		$	—		$	—		$	261,940
Trade payable program liability	11,156			—			—			—			11,156
Accrued expenses	45,410			90,428			195,472			(40,549		)	290,761
Deferred income taxes	64			21,690			(6,337		)	—			15,417
Current maturities of long-term debt and obligations under capital leases	1,257			—			—			—			1,257
Total Current Liabilities	319,818			112,127			189,135			(40,549		)	580,531
Long-term debt and obligations under capital leases, less current maturities	423,572			43,667			—			—			467,239
Convertible long-term debt	119,000			—			—			—			119,000
Other long-term liabilities	9,625			28,359			—			19,497			57,481
Intercompany liabilities	716,978			(1,353		)	—			(715,625		)	—
Deferred income taxes	(7,152		)	10,089			—			—			2,937
Stockholders’ Equity:
Common stock	68,557			1,502			100			(1,602		)	68,557
Additional paid-in capital	288,098			436,858			3,900			(440,758		)	288,098
Retained earnings	481,926			2,357,802			10,107			(2,367,909		)	481,926
Accumulated other comprehensive loss	(3,565		)	—			—			—			(3,565		)
Less:
Cost of shares in treasury	(181,187		)	—			—			—			(181,187		)
Cost of shares in benefits trust	(59,264		)	—			—			—			(59,264		)
Total Stockholders’ Equity	594,565			2,796,162			14,107			(2,810,269		)	594,565
Total Liabilities and Stockholders’ Equity	$	2,176,406		$	2,989,051		$	203,242		$	(3,546,946	)	$	1,821,753

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

(dollar amounts in thousands)

(unaudited)

Thirteen weeks ended October 28, 2006	Pep Boys			Subsidiary Guarantors			Subsidiary Non- Guarantors			Consolidation/ Elimination			Consolidated

Merchandise Sales	$	156,507		$	297,204		$	—		$	—		$	453,711
Service Revenue	33,748			63,390			—			—			97,138
Other Revenue	—			—			6,705			(6,705		)	—
Total Revenues	190,255			360,594			6,705			(6,705		)	550,849
Costs of Merchandise Sales	110,308			212,717			—			—			323,025
Costs of Service Revenue	31,474			58,657			—			—			90,131
Costs of Other Revenue	—			—			8,191			(8,191		)	—
Total Costs of Revenues	141,782			271,374			8,191			(8,191		)	413,156
Gross Profit from Merchandise Sales	46,199			84,487			—			—			130,686
Gross Profit from Service Revenue	2,274			4,733			—			—			7,007
Gross Loss from Other Revenue	—			—			(1,486		)	1,486			—
Total Gross Profit (Loss)	48,473			89,220			(1,486		)	1,486			137,693
Selling, General and Administrative Expenses	49,071			88,599			99			1,486			139,255
Net Gain From Sale of Assets	25			188			—			—			213
Operating Profit (Loss)	(573		)	809			(1,585		)	—			(1,349		)
Non-operating (Expense) Income	(4,564		)	11,638			433			(6,490		)	1,017
Interest Expense (Income)	30,167			(6,772		)	(1,324		)	(6,490		)	15,581
(Loss) Earnings From Continuing Operations Before Income Taxes and Cumulative Effect of Change in Accounting Principle	(35,304		)	19,219			172			—			(15,913		)
Income Tax (Benefit) Expense	(3,623		)	(1,613		)	36			—			(5,200		)
Equity in Earnings of Subsidiaries	20,785			26,138			—			(46,923		)	—
Net (Loss) Earnings From Continuing Operations Before Cumulative Effect of Change in Accounting Principle	(10,896		)	46,970			136			(46,923		)	(10,713		)
Discontinued Operations, Net of Tax	(22		)	(183		)	—			—			(205		)
Cumulative Effect of Change in Accounting principle, Net of Tax	4			—			—			—			4
Net (Loss) Earnings	$	(10,914	)	$	46,787		$	136		$	(46,923	)	$	(10,914	)

Thirteen weeks ended October 29, 2005	Pep Boys			Subsidiary Guarantors			Subsidiary Non- Guarantors			Consolidation/ Elimination			Consolidated

Merchandise Sales	$	158,186		$	294,170		$	—		$	—		$	452,356
Service Revenue	31,817			61,731			—			—			93,548
Other Revenue	—			—			7,354			(7,354		)	—
Total Revenues	190,003			378,791			7,354			(7,354		)	545,904
Costs of Merchandise Sales	116,829			221,070			—			—			337,899
Costs of Service Revenue	29,939			58,953			—			—			88,892
Costs of Other Revenue	—			—			7,135			(7,135		)	—
Total Costs of Revenues	146,768			280,023			7,135			(7,135		)	426,791
Gross Profit from Merchandise Sales	41,357			73,100			—			—			114,457
Gross Profit from Service Revenue	1,878			2,778			—			—			4,656
Gross Loss from Other Revenue	—			—			219			(219		)	—
Total Gross Profit (Loss)	43,235			75,878			219			(219		)	119,113
Selling, General and Administrative Expenses	43,804			83,363			89			(219		)	127,037
Net Gain (Loss) from Sales of Assets	44			(673		)	—			—			(629		)
Operating (Loss) Profit	(525		)	(8,158		)	130			—			(8,553		)
Non-operating (Expense) Income	(4,544		)	23,067			166			(18,163		)	526
Interest Expense (Income)	18,849			9,547			(1,028		)	(18,163		)	9,205
(Loss) Earnings From Continuing Operations Before Income Taxes	(23,918		)	5,362			1,324			—			(17,232		)
Income Tax (Benefit) Expense	(10,776		)	4,464			456			—			(5,856		)
Equity in Earnings of Subsidiaries	2,346			8,182			—			(10,528		)	—
Net (Loss) Earnings From Continuing Operations	(10,796		)	9,080			868			(10,528		)	(11,376		)
Discontinued Operations, Net of Tax	206			(26		)	—			—			180
Cumulative Effect of Change in Accounting Principle, Net of Tax	—			—			—			—			—

Net (Loss) Earnings	$	(10,590	)	$	9,054		$	868		$	(10,528	)	$	(11,196	)

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

(dollar amounts in thousands)

(unaudited)

Thirty-nine weeks ended October 28, 2006	Pep Boys			Subsidiary Guarantors			Subsidiary Non- Guarantors			Consolidation/ Elimination			Consolidated

Merchandise Sales	$	484,535		$	908,488		$	—		$	—		$	1,393,023
Service Revenue	102,020			190,972			—			—			292,992
Other Revenue	—			—			20,845			(20,845		)	—
Total Revenues	586,555			1,099,460			20,845			(20,845		)	1,686,015
Costs of Merchandise Sales	343,075			652,372			—			—			995,447
Costs of Service Revenue	94,210			174,685			—			—			268,895
Costs of Other Revenue	—			—			24,155			(24,155		)	—
Total Costs of Revenues	437,285			827,057			24,155			(24,155		)	1,264,342
Gross Profit from Merchandise Sales	141,460			256,116			—			—			397,576
Gross Profit from Service Revenue	7,810			16,287			—			—			24,097
Gross Loss from Other Revenue	—			—			(3,310		)	3,310			—
Total Gross Profit (Loss)	149,270			272,403			(3,310		)	3,310			421,673
Selling, General and Administrative Expenses	141,472			264,977			261			3,310			410,020
Net Gain From Sale of Assets	9			6,220			—			—			6,229
Operating Profit (Loss)	7,807			13,646			(3,571		)	—			17,882
Non-operating (Expense) Income	(14,026		)	69,033			1,158			(50,871		)	5,294
Interest Expense (Income)	83,685			8,853			(3,781		)	(50,871		)	37,886
(Loss) Earnings From Continuing Operations Before Income Taxes and Cumulative Effect of Change in Accounting Principle	(89,904		)	73,826			1,368			—			(14,710		)
Income Tax (Benefit) Expense	(4,249		)	(454		)	103			—			(4,600		)
Equity in Earnings of Subsidiaries	75,245			96,404			—			(171,649		)	—
Net (Loss) Earnings From Continuing Operations Before Cumulative Effect of Change in Accounting Principle	(10,410		)	170,684			1,265			(171,649		)	(10,110		)
Discontinued Operations, Net of Tax	(38		)	(300		)	—			—			(338		)
Cumulative Effect of Change in Accounting Principle, Net of Tax	183			—			—			—			183
Net (Loss) Earnings	$	(10,265	)	$	170,384		$	1,265		$	(171,649	)	$	(10,265	)

Thirty-nine weeks ended October 29, 2005	Pep Boys			Subsidiary Guarantors			Subsidiary Non- Guarantors			Consolidation/ Elimination			Consolidated

Merchandise Sales	$	481,435		$	915,377		$	—		$	—		$	1,396,812
Service Revenue	99,803			190,933			—			—			290,736
Other Revenue	—			—			22,229			(22,229		)	—
Total Revenues	581,238			1,106,310			22,229			(22,229		)	1,687,548
Costs of Merchandise Sales	360,090			671,023			—			—			1,031,113
Costs of Service Revenue	88,489			171,091			—			—			259,580
Costs of Other Revenue	—			—			25,404			(25,404		)	—
Total Costs of Revenues	448,579			842,114			25,404			(25,404		)	1,290,693
Gross Profit from Merchandise Sales	120,345			245,354			—			—			365,699
Gross Profit from Service Revenue	11,314			19,842			—			—			31,156
Gross Loss from Other Revenue	—			—			(3,175		)	3,175			—
Total Gross Profit (Loss)	132,659			264,196			(3,175		)	3,175			396,855
Selling, General and Administrative Expenses	135,501			256,443			248			3,175			395,367
Net (Loss) Gain from Sales of Assets	(567		)	3,544			—			—			2,977
Operating (Loss) Profit	(3,409		)	11,297			(3,423		)	—			4,465
Non-operating (Expense) Income	(12,516		)	65,100			340			(50,177		)	2,747
Interest Expense (Income)	57,089			23,208			(2,766		)	(50,177		)	27,354
(Loss) Earnings From Continuing Operations Before Income Taxes	(73,014		)	53,189			(317		)	—			(20,142		)
Income Tax (Benefit) Expense	(29,029		)	22,107			(290		)	—			(7,212		)
Equity in Earnings of Subsidiaries	31,333			43,707			—			(75,040		)	—
Net (Loss) Earnings From Continuing Operations	(12,652		)	74,789			(27		)	(75,040		)	(12,930		)

Discontinued Operations, Net of Tax	331			(328		)	—			—			3
Net (Loss) Earnings	$	(12,321	)	$	74,461		$	(27	)	$	(75,040	)	$	(12,927	)

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

(dollar amount in thousands)

(unaudited)

Thirty-nine weeks ended October 28, 2006	Pep Boys			Subsidiary Guarantors			Subsidiary Non- Guarantors			Consolidation/ Elimination			Consolidated

Cash Flows from Operating Activities:
Net (loss) earnings	$	(10,265	)	$	170,384		$	1,265		$	(171,649	)	$	(10,265	)
Adjustments to Reconcile Net (Loss) Earnings to Net Cash (Used in) Provided by Continuing Operations	(56,311		)	(65,396		)	597			171,649			50,539
Change in operating assets and liabilities	50,091			1,762			(7,779		)	—			44,074
Net cash (used in) provided by continuing operations	(16,485		)	106,750			(5,917		)	—			84,348
Net cash used in discontinued operations	(58		)	(309		)	—			—			(367		)
Net Cash (Used in) Provided by Operating Activities	(16,543		)	106,441			(5,917		)	—			83,981
Net Cash Used in Investing Activities	(2,083		)	(5,269		)	(33,830		)	—			(41,182		)
Net Cash Provided by (Used in) Financing Activities	19,505			(100,331		)	12,238			—			(68,588		)
Net Increase (Decrease) in Cash	879			841			(27,509		)	—			(25,789		)
Cash and Cash Equivalents at Beginning of Period	12,019			6,953			29,309			—			48,281
Cash and Cash Equivalents at End of Period	$	12,898		$	7,794		$	1,800		$	—		$	22,492

Thirty-nine weeks ended October 29, 2005	Pep Boys			Subsidiary Guarantors			Subsidiary Non- Guarantors			Consolidation/ Elimination			Consolidated

Cash Flows from Operating Activities:
Net (loss) earnings	$	(12,321	)	$	74,461		$	(27	)	$	(75,040	)	$	(12,927	)
Adjustments to Reconcile Net (Loss) Earnings from Continuing Operations to Net Cash Provided by (Used In) discontinued Operations	88,911			(120,905		)	430			75,040			43,476
Change in operating assets and liabilities	(26,207		)	689			(4,319		)	—			(29,837		)
Net cash provided by (used in) continuing operations	50,383			(45,755		)	(3,916		)	—			712
Net cash (used in) provided by discontinued operations	(1,371		)	1,112			—			—			(259		)
Net Cash Provided by (Used in) Operating Activities	49,012			(44,643		)	(3,916		)	—			453
Cash Flows from Investing Activities:
Net Cash Used in Continuing Operations	(18,070		)	(38,978		)	—			—			(57,048		)
Net Cash Provided by discontinued operations	916			—			—			—			916
Net Cash Used in Investing Activities	(17,154		)	(38,978		)	—			—			(56,132		)
Net Cash (Used in) Provided by Financing Activities	(78,053		)	83,048			4,460			—			9,455
Net (Decrease) Increase in Cash	(46,195		)	(573		)	544			—			(46,224		)
Cash and Cash Equivalents at Beginning of Period	59,032			8,474			15,252			—			82,758
Cash and Cash Equivalents at End of Period	$	12,837		$	7,901		$	15,796		$	—		$	36,534

NOTE 13. Contingencies

The Company is not currently engaged in any litigation arising outside the ordinary course of its business that it believes to be material. The Company is party to various actions and claims, including purported class actions, arising in the normal course of business. The Company believes that amounts accrued for awards or assessments in connection with 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 or results of operations.

NOTE 14. Comprehensive Loss

The following are the components of comprehensive loss:

	Thirteen Weeks Ended						Thirty-nine Weeks Ended
(Amounts in thousands)	October 28, 2006			October 29, 2005			October 28, 2006			October 29, 2005

Net loss	$	(10,914	)	$	(11,196	)	$	(10,265	)	$	(12,927	)

Other comprehensive income (loss), net of tax:

Minimum pension liability adjustments	—			—			—			345

Derivative financial instrument adjustments	(768		)	520			(644		)	1,503

Comprehensive loss	$	(11,682	)	$	(10,676	)	$	(10,909	)	$	(11,079	)

The components of accumulated other comprehensive loss are:

	October 28, 2006			January 28, 2006

Derivative financial instrument adjustment, net of tax	$	3,016		$	3,660
Minimum pension liability adjustment, net of tax	(7,225		)	(7,225		)
	$	(4,209	)	$	(3,565	)

NOTE 15. Subsequent Event

On November 21, 2006, the Company reached a settlement, subject to court approval, of three pending actions involving various wage and hour claims under the Federal Fair Labor Standards Act and California state law for an aggregate amount of $4,550,000. The Company’s condensed consolidated financial statements included in this Quarterly Report on Form 10Q have been adjusted to include this settlement. The charge is recorded within SG&A expenses for the thirteen and thirty-nine weeks ended October 28, 2006.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The discussion and analysis below for the Company should be read in conjunction with (i) the financial statements and the notes to such financial statements included elsewhere in this Form 10-Q and (ii) the financial statements and the notes to such financial statements included in Item 8, “Financial Statements and Supplementary Data” of our Annual Report on Form 10-K for the fiscal year ended January 28, 2006.

OVERVIEW

The Pep Boys - Manny, Moe & Jack is a leader in the automotive aftermarket with 593 stores located throughout 36 states and Puerto Rico. All of our stores feature the nationally recognized Pep Boys brand name, established through more than 80 years of providing high-quality automotive merchandise and services, and are company-owned, ensuring chain-wide consistency for our customers. We are the only national chain offering automotive service, accessories, tires and parts under one roof, positioning us to achieve our goal of becoming the category dominant one-stop shop for automotive maintenance products and services.

For the thirteen weeks ended October 28, 2006, our comparable sales (sales generated by locations in operation during the same period) increased by 0.8%, compared to a decrease of 2.0% for the thirteen weeks ended October 29, 2005. The increase resulted from stronger core merchandise sales (e.g. hard parts, oil and chemicals) over the prior period, and a 3.9% increase in labor revenue, offset by weaker sales of generators, which were sold at heightened levels in the third quarter of 2005 due to the active hurricane season.

During the third quarter of fiscal 2006, we continued to reinvest in our stores to redesign their interiors and enhance their exterior appeal. During the thirteen weeks ended October 28, 2006, we grand reopened an additional 13 stores in Florida, following the grand reopening of approximately 66 stores in New York, Florida and Colorado in the twenty-six weeks ended July 29, 2006. Approximately 25 additional stores are expected to be remodeled and grand reopened during the remainder of fiscal 2006. In fiscal 2007, we expect to remodel and grand reopen approximately 125-150 stores, with the balance of approximately 140-160 stores to be completed in fiscal 2008 and 2009.

The following discussion explains the material changes in our results of operations for the thirteen and thirty-nine weeks ended October 28, 2006 and the significant developments affecting our financial condition since January 28, 2006. We strongly recommend that you read the audited financial statements and footnotes and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended January 28, 2006.

LIQUIDITY AND CAPITAL RESOURCES - October 28, 2006

Our cash requirements arise principally from capital expenditures related to existing stores, offices and warehouses and from the purchase of inventory. While the primary capital expenditures for the thirty-nine weeks ended October 28, 2006 continue to be attributed to store redesigns, the rate of our store refurbishment program was decreased significantly both as a result of our decision in the second quarter to extend it through fiscal 2009 as well as its increased cost-effectiveness. During the thirty-nine weeks ended October 28, 2006, we invested approximately $25,000,000 in property and equipment, a reduction of approximately 60% from the first three quarters of fiscal 2005. We estimate that capital expenditures related to existing stores, warehouses and offices during the remainder of fiscal 2006 will be less than $25,000,000, related primarily to the redesign of our existing stores.

We anticipate that our net cash provided by operating activities and our existing revolving credit facility will exceed our principal cash requirements for capital expenditures and inventory purchases for the remainder of fiscal 2006 and fiscal 2007.

On October 27, 2006, we amended and restated our Senior Secured Term Loan Facility dated January 27, 2006. The amendment increased the size of the facility from $200,000,000 to $320,000,000, extended its maturity from January 27, 2011 to October 27, 2013 and reduced its interest rate from London Interbank Offered Rate (LIBOR) plus 3.00% to LIBOR plus 2.75%. The interest rate can be further reduced to LIBOR plus 2.50% upon achieving a specified leverage ratio. Accordingly, the number of our stores included in the collateral pool securing the facility increased from 154 to 241.

Proceeds from the facility were used to satisfy and discharge our outstanding $119,000,000 4.25% Convertible Senior Notes due June 1, 2007 by deposit into an escrow fund with an independent trustee. The right of the holders of the convertible notes to convert them into shares of our common stock, at any time until the June 1, 2007 maturity date, survives such satisfaction and discharge. The conversion price is $22.40 per share. We recorded a non-cash charge for the value of such conversion

right, approximately $755,000 as determined by the Black-Scholes method, in our consolidated statement of operations for the thirteen and thirty-nine weeks ended October 28, 2006.

During the thirteen weeks ended October 28, 2006 we repaid approximately $25,000,000 of life insurance proceeds, which had been withdrawn against the cash surrender value of our life insurance policies during fiscal 2005.

Working capital decreased from $247,526,000 at January 28, 2006 to $170,746,000 at October 28, 2006, primarily due to repayments of our long term line of credit and a decrease in reinsurance receivable. At October 28, 2006, we had stockholders’ equity of $575,643,000 and long-term debt, net of current maturities, of $524,426,000. Our long-term debt was 47.7% of our total capitalization at October 28, 2006 and 49.6% at January 28, 2006. As of October 28, 2006, we had an available line of credit totaling $218,968,000 and a cash and cash equivalents balance of $22,492,000.

As a convenience to our vendors, we provide a vendor financing program with an availability of $20,000,000. Under this program, the Company’s factor makes accelerated and discounted payments to our vendors and the Company, in turn, makes its regularly scheduled full vendor payments to the factor. As of October 28, 2006, the Company had an outstanding balance of $13,284,000 under these arrangements, classified as trade payable program liability in the consolidated balance sheet.

CONTRACTUAL OBLIGATIONS

The following charts represent the Company’s total contractual obligations and commercial commitments as of October 28, 2006:

(dollar amounts in thousands) Obligation	Total		Due in less than 1 year		Due in 1-3 years		Due in 3-5 years		Due After 5 years
Long-term debt	$	526,367	$	2,419	$	6,443	$	12,546	$	504,959
Operating leases	595,111		66,586		239,883		82,344		206,298
Expected scheduled interest payments on all long-term debt	305,125		37,055		81,669		80,510		105,891
Capital leases	745		222		523		—		—
Unconditional purchase obligation	4,320		945		1,890		1,485		—
Total cash obligations	$	1,431,668	$	107,227	$	330,408	$	176,885	$	817,148

The table excludes our pension obligation. Future plan contributions are dependent upon actual plan asset returns and interest rates. We originally expected to contribute approximately $1,417,000 to our pension plan in fiscal 2006. As of October 28, 2006, $228,000 of contributions had been made. We now anticipate total pension contributions for fiscal 2006 to be approximately $515,000.

(dollar amounts in thousands) Commercial Commitments	Total		Due in less than 1 year		Due in 1-3 years		Due in 3-5 years		Due After 5 years
Import letters of credit	$	327	$	327	$	—	$	—	$	—
Standby letters of credit	55,708		55,708		—		—		—
Surety bonds	11,454		11,246		208		—		—
Total commercial commitments	$	67,489	$	67,281	$	208	$	—	$	—

OTHER CONTRACTUAL OBLIGATIONS

In the first quarter of fiscal 2005, we entered into a contractual commitment to purchase approximately $4,800,000 of products over a six-year period. The commitment for years two through five is approximately $945,000 per year, while the first and final year’s commitment is approximately $500,000. Following year two, we are obligated to pay the vendor a per unit reimbursement for any shortfall between our cumulative purchases during the two year period then ended and the minimum purchase requirement. For years three through six, we are obligated to pay the vendor a per unit reimbursement for any annual shortfall. The maximum obligation under any shortfall is approximately $945,000. At October 28, 2006, we expect to satisfy each of the cumulative minimum purchase requirements under this contract.

DISCONTINUED OPERATIONS

In accordance with SFAS No. 144, our discontinued operations has reflected the ongoing costs associated with eleven stores remaining from the 33 stores closed on July 31, 2003 as part of our corporate restructuring (see Note 6 of Item 1—Notes to Condensed Consolidated Financial Statements).

Store Transfers

During the second quarter of fiscal 2006, we sold a store that we have leased back and will continue to operate for a one year period. Due to our significant continuing involvement with this store following the sale, we reclassified back into continuing operations, for all periods presented, this store’s revenues and costs that had been previously reclassified into discontinued operations during the third quarter of fiscal 2005, in accordance with SFAS No. 144 and EITF 03-13.

RESULTS 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
Thirteen weeks ended	October 28, 2006 (Fiscal 2006)		October 29, 2005 (Fiscal 2005)		Favorable (Unfavorable)

Merchandise Sales	82.4	%	82.9	%	0.3	%
Service Revenue (1)	17.6		17.1		3.8
Total Revenues	100.0		100.0		0.9
Costs of Merchandise Sales (2)	71.2	(3)	74.7	(3)	4.4
Costs of Service Revenue (2)	92.8	(3)	95.0	(3)	(1.4	)
Total Costs of Revenues	75.0		78.2		3.2
Gross Profit from Merchandise Sales	28.8	(3)	25.3	(3)	14.2
Gross Profit from Service Revenue	7.2	(3)	5.0	(3)	50.5
Total Gross Profit	25.0		21.8		15.6
Selling, General and Administrative Expenses	25.3		23.3		(9.6	)
Net Gain (Loss) on Sales of Assets	—		(0.1	)(5)	133.9
Operating Loss	(0.3	)	(1.6	)	84.2
Non-operating Income	0.2		0.1		93.3
Interest Expense	2.8		1.7		(69.3	)
Loss from Continuing Operations Before Income Taxes and Cumulative Effect of Change in Accounting Principle	(2.9	)	(3.2	)	7.7
Income Tax Benefit	32.7	(4)	34.0	(4)	32.7
Net Loss from Continuing Operations Before Cumulative Effect of Change in Accounting Principle	(2.0	)	(2.1	)	5.8
Discontinued Operations, Net of Tax	—		—		—
Cumulative Effect of Change in Accounting Principle, Net of Tax	—		—		—
Net Loss	(2.0	)	(2.1	)	2.5

(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 Loss from Continuing Operations Before Income Taxes and Cumulative Effect of Change in Accounting Principle.

(5) Net Gain (Loss) on Sales of Assets for 2005 was reclassified primarily from Costs of Merchandise Sales (see Note 1 of Item 1- Notes to Condensed Consolidated Financial Statements).

Thirteen Weeks Ended October 28, 2006 vs. Thirteen Weeks Ended October 29, 2005

Total revenues for the third quarter increased 0.9%. This increase was due primarily to an increase in comparable revenues (revenues generated by locations in operation during the same period) of 0.8%. Comparable merchandise sales increased 0.2% while comparable service revenue increased 3.9%.

Gross profit from merchandise sales increased, as a percentage of merchandise sales, to 28.8% in fiscal 2006 from 25.3% in fiscal 2005. This was a 14.2% or $16,229,000 increase from the prior period. This increase as a percentage of merchandise sales was due primarily to an increase in merchandise margins and lower warehousing costs, offset by higher occupancy costs. The increase in merchandise margins resulted from the restructuring of our vendor agreements, lower freight costs and a more favorable product mix. Effective January 29, 2006, substantially all of our vendor agreements were restructured to no longer identify specific incremental expenses for cooperative advertising; therefore, all vendor support funds are now treated as a reduction of inventories and are recognized as an increase to gross profit from merchandise sales as the inventories are sold, in accordance with EITF 02-16. Gross profit from merchandise sales for the thirteen weeks ended October 28, 2006 improved by approximately $6,760,000 compared to the thirteen weeks ended October 29, 2005 primarily as a result of these contractual changes. Warehousing costs were lower due to reduced payroll, public storage and temporary labor costs. The increase in store occupancy costs was due to an increase in utility and rental equipment costs, in addition to higher depreciation costs related to a larger cumulative base of stores remodeled under the grand reopening program.

Gross profit from service revenue increased, as a percentage of service revenue, to 7.2% in fiscal 2006 from 5.0% in fiscal 2005. This was a 50.5% or $2,351,000 increase from the prior period. This increase, as a percentage of service revenue, was due mainly to greater service revenue, combined with a relatively flat cost structure.

Selling, general and administrative expenses increased, as a percentage of total revenues, to 25.3% in fiscal 2006 from 23.3% in fiscal 2005. This was a 9.6% or $12,218,000 increase from the prior period. This increase, as a percentage of total revenues, was due to increased net media expense and general and administrative expenses. The increase in net media expense was caused by a change in our vendor agreements, which resulted in a different application of EITF 02-16, whereby approximately $7,510,000 in vendor support funds were recorded as a reduction in advertising costs for the thirteen weeks ended October 28, 2005 (see above explanation of vendor agreement restructuring). The increase in general and administrative expenses was due primarily to $4,550,000 for the November 21, 2006 settlement of various litigation matters.

Interest expense increased $6,376,000 primarily due to a charge of approximately $4,200,000 for the remaining interest associated with the early satisfaction and discharge of the 4.25% Convertible Senior Notes on October 27, 2006, and the value of the surviving conversion right expiring June 1, 2007. Additionally, there was an approximate 25 basis point increase in the weighted average interest rate on a flat weighted average debt level.

Results from discontinued operations for the third quarter of 2006 was a loss of $205,000 (net of tax) compared to a profit of $181,000 (net of tax) in the third quarter of fiscal 2005.

Cumulative effect of change in accounting principle, net of tax, increased from the initial amount recorded upon adoption of FAS 123R at April 29, 2006 as a result of a change in the estimated annual effective tax rate.

Net loss decreased, as a percentage of total revenues, due primarily to an increase in total gross profit, as a percentage of sales, offset by higher interest and selling, general and administrative expenses.

Results of Operations -

	Percentage of Total Revenues				Percentage Change
	October 28, 2006		October 29, 2005		Favorable
Thirty-nine weeks ended	(Fiscal 2006)		(Fiscal 2005)		(Unfavorable)
Merchandise Sales	82.6	%	82.8	%	(0.3	)%
Service Revenue (1)	17.4		17.2		(0.8	)
Total Revenues	100.0		100.0		(0.1	)
Costs of Merchandise Sales (2)	71.5	(3)	73.8	(3)	3.5
Costs of Service Revenue (2)	91.8	(3)	89.3	(3)	(3.6	)
Total Costs of Revenues	75.0		76.5		2.0
Gross Profit from Merchandise Sales	28.5	(3)	26.2	(3)	8.7
Gross Profit from Service Revenue	8.2	(3)	10.7	(3)	(22.7	)
Total Gross Profit	25.0		23.5		6.3
Selling, General and Administrative Expenses	24.3		23.4		(3.7	)
Net Gain on Sales of Assets	0.3		0.2	(5)	109.2
Operating Profit	1.1		0.3		300.5
Non-operating Income	0.3		0.2		92.7
Interest Expense	2.2		1.6		(38.5	)
Loss from Continuing Operations Before Income Taxes and Cumulative Effect of Change in Accounting Principle	(0.9	)	(1.1	)	27.0
Income Tax Benefit	31.3	(4)	35.8	(4)	(36.2	)
Loss from Continuing Operations Before Cumulative Effect of Change in Accounting Principle	(0.6	)	(0.8	)	21.8
Discontinued Operations, Net of Tax	—		—		—
Cumulative Effect of Change in Accounting Principle, Net of Tax	—		—		—
Net Loss	(0.6	)	(0.8	)	20.6

(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.

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

(4) As a percentage of Loss from Continuing Operations Before Income Taxes and Cumulative Effect of Change in Accounting Principle.

(5) Net Gain on Sales of Assets for 2005 was reclassified primarily from Costs of Merchandise Sales (see Note 1 of Item 1- Notes to Condensed Consolidated Financial Statements).

Thirty-nine Weeks Ended October 28, 2006 vs. Thirty-nine Weeks Ended October 29, 2005

Total revenues for the first thirty-nine weeks of fiscal 2006 decreased 0.1%. Comparable revenues (revenues generated by locations in operation during the same period) were essentially unchanged. Comparable merchandise sales were slightly negative, while comparable service revenue increased 1.0%.

Gross profit from merchandise sales increased, as a percentage of merchandise sales, to 28.5% in fiscal 2006 from 26.2% in fiscal 2005. This was an 8.7% or $31,877,000 increase from the prior period. This increase as a percentage of merchandise sales was due primarily to an increase in merchandise margins and lower warehousing costs, offset by higher occupancy costs and purchasing payroll. The increase in merchandise margins resulted from the restructuring of our vendor agreements and lower inventory shrinkage estimates, offset by a less favorable product mix. Effective January 29, 2006, substantially all of our vendor agreements were restructured to no longer identify specific incremental expenses for cooperative advertising; therefore, all vendor support funds are now treated as a reduction of inventories and are recognized as an increase to gross profit from merchandise sales as the inventories are sold, in accordance with EITF 02-16. Gross profit from merchandise sales for the thirty-nine weeks ended October 28, 2006 improved by approximately $27,900,000 compared to the thirty-nine weeks ended October 29, 2005 primarily as a result of these contractual changes. Warehousing costs were lower due to reduced rent and lower public storage, payroll and temporary labor costs. The increase in store occupancy costs was due to an increase in depreciation costs related to a larger cumulative base of stores remodeled under the grand reopening program, in addition to higher utility and rental equipment costs.

Gross profit from service revenue decreased, as a percentage of service revenue to 8.2% in fiscal 2006 from 10.7% in fiscal 2005. This was a 22.7% or $7,059,000 decrease from the prior period. This decrease, as a percentage of service revenue, was due to higher payroll and depreciation costs. The increase in payroll was primarily due to a higher utilization of more skilled labor, increased incentives and bonuses and increased staffing.

Selling, general and administrative expenses increased, as a percentage of total revenues, to 24.3% in fiscal 2006 from 23.4% in fiscal 2005. This was a 3.7% or $14,653,000 increase from the prior period. This increase, as a percentage of total revenues, was due to increased net media expense and general and administrative expense, offset by decreases in store expenses and benefits. The increase in net media expense was caused by a change in our vendor agreements which resulted in a different application of EITF 02-16, whereby approximately $26,900,000 in vendor support funds were recorded as a reduction in advertising costs for the thirty-nine weeks ended October 29, 2005 (see above explanation of vendor agreement restructuring), offset by lower gross media expenditures than were experienced in the prior year related to the grand reopenings of the Los Angeles, Philadelphia and Chicago metropolitan markets. The increase in general and administrative expenses was due primarily to $4,550,000 for the settlement of various litigation matters and approximately $2,300,000 of costs related to the Company’s strategic review process and the resolution of certain threatened proxy contests, offset in part, by lower hiring and moving, insuarance and systems consulting expenses. The decrease in store expenses was due primarily to a favorable insurance settlement of $2,300,000, a favorable litigation settlement of approximately $2,100,000 from certain of our credit card processors and reduced payroll of approximately $2,100,000.

Net gain on sales of assets increased, as a percentage of total revenues, to 0.3% in fiscal 2006 from 0.2% in fiscal 2005. This was a 109.2% or $3,252,000 increase from the prior year. This increase, as a percentage of total revenues, was due primarily to a gain of $6,329,000 from a sale of a store in fiscal 2006, compared to a gain of $5,177,000 offset by a loss of $502,000 related to stores sold in fiscal 2005.

Interest expense increased $10,532,000 primarily due to a charge of approximately $4,200,000 for the remaining interest associated with the early satisfaction and discharge of the 4.25% Convertible Senior Notes on October 27, 2006, and the value of the surviving conversion right expiring June 1, 2007. Additionally, there was an approximate 40 basis point increase in the weighted average interest rate on a higher weighted average debt level.

Results from discontinued operations for 2006 was a loss of $338,000 (net of tax) compared to a gain of $3,000 (net of tax) in 2005.

Net loss decreased, as a percentage of total revenues, due primarily to an increase in total gross profit and in net gain on sales of assets, as a percentage of sales, offset by higher interest and selling, general and administrative costs.

INDUSTRY COMPARISON

We operate in the U.S. automotive aftermarket, which has two general competitive arenas: the Do-It-For-Me (“DIFM”) (service labor, installed merchandise and tires) market and the Do-It-Yourself (“DIY”) (retail merchandise) market. Generally, the specialized automotive retailers focus on either the “DIY” or “DIFM” areas of the business. We believe that our operation in both the “DIY” and “DIFM” areas of the business positively differentiates us from most of our competitors. Although operating performance is measured at a store level in aggregation, we believe that the following presentation shows an accurate comparison against competitors within the two sales arenas. We compete in the “DIY” area of the business through our retail sales floor and commercial sales business (Retail Sales). Our Service Center Business (labor and installed merchandise and tires) competes in the DIFM area of the industry.

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

	Thirteen weeks ended				Thirty-nine weeks ended
(Dollar amounts in thousands)	October 28, 2006 Amount		October 29, 2005 Amount		October 28, 2006 Amount		October 29, 2005 Amount

Retail Sales (1)	$	323,522	$	328,877	$	1,005,033	$	1,023,087
Service Center Revenue (2)	227,327		217,027		680,982		663,661
Total Revenues	$	550,849	$	545,904	$	1,686,015	$	1,687,548
Gross Profit from Retail Sales (3)	$	93,554	$	82,969	$	283,322	$	262,575
Gross Profit from Service Center Revenue (3)	44,139		36,144		138,351		134,280
Total Gross Profit	$	137,693	$	119,113	$	421,673	$	396,855

(1) Excludes revenues from installed products.

(2) Includes revenues from installed products.

(3) Gross Profit from Retail Sales includes the cost of products sold, buying, warehousing and store occupancy costs. 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.

NEW ACCOUNTING STANDARDS

In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (SFAS No. 123R) requiring that the compensation cost relating to share-based payment transactions be recognized in financial statements. We adopted SFAS No. 123R on January 29, 2006 using the modified prospective method. The impact of adopting this Standard is discussed in Note 3 of Item 1 – Notes to Condensed Consolidated Financial Statements.

In June of 2006, the FASB ratified the consensus reached by the Emerging Issues Task Force on Issue 06-3, How Taxes Collected from Customers and Remitted to Governmental Authorities Should be Presented in the Income Statement (That Is, Gross versus Net Presentation). The scope of this consensus includes any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer and may include, but is not limited to sales, use, value added and some excise taxes. Additionally, this consensus seeks to address how a company should address the disclosure of such items in interim and annual financial statements, either gross or net pursuant to APB Opinion No. 22, Disclosure of Accounting Policies. We are required to adopt this statement in fiscal 2007. We present sales net of sales taxes in our consolidated statement of operations and do not anticipate changing its policy as a result of EITF 06-3.

In July of 2006, the FASB released FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement 109 (FIN 48). FIN 48 prescribes a model for the recognition and measurement of a tax position taken or expected to be taken in a tax return, and provides guidance on derecognition, classification, interest and penalties, disclosure and transition. We are required to adopt this Interpretation in fiscal 2007, and are currently evaluating the effect that this Interpretation will have on our consolidated financial statements.

for the purpose of a materiality assessment. The Company will be required to adopt the provisions of SAB 108 in its first year ending after November 15, 2006. The Company does not expect the adoption of this statement to have a material impact on its consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS 157). SFAS 157 defines the term fair value, establishes a framework for measuring it within GAAP and expands disclosures about its measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. We do not expect the adoption of this statement to have a material impact on our consolidated financial statements.

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans- an Amendment of FASB Statements No. 87, 88, 106 and 132(R)” (SFAS 158). SFAS 158 requires entities to recognize the overfunded or underfunded status of its defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in such funded status in the year in which the changes occur through comprehensive income. Additionally, an entity’s defined benefit plan assets and obligations must be measured as of the date of the entity’s fiscal year end statement of financial position (with limited exception). The funded status requirement under SFAS 158 is effective for financial statements issued for fiscal years ending after December 15, 2006, while the measurement date requirement is effective as of the date of the entity’s fiscal year-end statement of financial position for fiscal years ending after December 15, 2008. We expect to reduce comprehensive income on our February 3, 2007 consolidated statement of financial position by the elimination of a prepaid intangible asset and the creation of an additional liability.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Additionally, we estimate our interim product gross margins in accordance with Accounting Principles Bulletin No. 28, “Interim Financial Reporting”.

On an on-going basis, we evaluate our estimates and judgments, including those related to customer incentives, product returns and warranty obligations, bad debts, inventories, income taxes, financing operations, restructuring costs, retirement benefits, risk participation agreements and contingencies and litigation. We base our estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. For a detailed discussion of significant accounting policies that may involve a higher degree of judgment or complexity, refer to “Critical Accounting Policies and Estimates” as reported in our Form 10-K for the year ended January 28, 2006, which disclosures are hereby incorporated by reference.

FORWARD-LOOKING STATEMENTS

Certain statements contained herein constitute “forward-looking statements” within the meaning of The Private Securities Litigation Reform Act of 1995. The words “guidance,” “expect,” “anticipate,” “estimates,” “forecasts” and similar expressions are intended to identify such forward-looking statements. Forward-looking statements include management’s expectations regarding 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 such 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). We assume no obligation to update or supplement forward-looking statements that become untrue because of subsequent events.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company does not utilize financial instruments for trading purposes and does not hold any derivative financial instruments that could expose the Company to significant market risk. The Company’s primary market risk exposure with regard to financial instruments is to changes in interest rates. Pursuant to the terms of its revolving credit agreement, changes in the London Interbank Offered Rate (LIBOR) could affect the rates at which the Company could borrow funds thereunder. At October 28, 2006, the Company had borrowings of $6,095,000 under this facility. Additionally, the Company has a $320,000,000 Senior Secured Term Loan facility that bears interest at LIBOR plus 2.75%, and approximately $122,287,000 of real estate operating leases that vary based on changes in LIBOR.

We have entered into an interest rate swap, which was designated as a cash flow hedge to convert the variable LIBOR portion of the real estate lease payments to a fixed rate of 2.90%, terminating on July 1, 2008 (coterminous with the leases noted above). If the critical terms of the interest rate swap or the hedge item do not change, the interest rate swap will be considered to be highly effective with all changes in fair value included in other comprehensive income. As of October 28, 2006 and January 28, 2006, the fair values of the interest rate swap were $4,759,000 ($3,015,000 net of tax) and $5,790,000 ($3,660,000, net of tax), respectively, and these changes in value were included in accumulated other comprehensive loss on the consolidated balance sheet.

Item 4. Controls and Procedures

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

Our controls and procedures are designed to ensure that information required to be disclosed is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. The Company’s management, with the participation of the Company’s chief executive officer and chief financial officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the chief executive officer and chief financial officer concluded that our disclosure controls and procedures as of the end of the period covered by this report are functioning effectively to provide reasonable assurance that the information required to be disclosed by the Company in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

In connection with the filing of this Form 10-Q, the Company’s management, with the participation of the Company’s chief executive officer and chief financial officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the chief executive officer and chief financial officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were effective as of the end of the period covered by this report.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

No change in the Company’s internal control over financial reporting occurred during the fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

Item 1A. Risk Factors

There have been no changes to the risks described in the Company’s previously filed Annual Report on Form 10-K for the fiscal year ended January 28, 2006.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Submission of Matters to a Vote of Security Holders

An annual meeting of shareholders was held on October 19, 2006. The shareholders elected the directors shown below.

Directors Elected at Annual Meeting of Shareholders

Name	Votes For	Votes Withheld
William Leonard	39,016,222	14,413,045
Peter A. Bassi	38,788,332	14,640,935
Jane Scaccetti	38,987,893	14,441,374
John T. Sweetwood	38,803,842	14,625,425
M. Shan Atkins	38,943,847	14,485,420
Robert H. Hotz	39,184,587	14,244,680
Max L. Lukens	51,802,513	1,626,754
James A. Mitarotonda	41,566,638	11,862,629
Nick White	52,038,901	1,390,366
James A. Williams	52,040,768	1,388,499
Thomas R. Hudson, Jr.	51,946,412	1,482,855

The shareholders also voted on the appointment of the Company’s independent auditors, Deloitte & Touche, LLP, with 52,793,187 affirmative votes, 548,149 negative votes and 87,931 abstentions.

The shareholders also voted on a shareholder proposal regarding the Company’s Shareholder Rights Plan with 35,046,129 affirmative votes, 9,105,045 negative votes, 363,158 abstentions and 8,914,935 broker non-votes.

Item 5. Other Information

None.

Item 6. Exhibits

4.1	Amendment to Rights Agreement, dated August 18, 2006, between the Company and the Rights Agent.	Incorporated by reference from the Company’s Form 8-K filed August 21, 2006.

10.1	Letter agreement dated July 17, 2006, between the Company and William Leonard.*	Incorporated by reference from the Company’s Form 8-K filed July 21, 2006.

10.2	Agreement dated August 2, 2006, between the Company and the Barington Group.	Incorporated by reference from the Company’s Form 8-K filed August 3, 2006.

10.3	Non-Competition Agreement, dated October 19, 2006, between the Company and Mark L. Page.*	Incorporated by reference from the Company’s Form 8-K filed October 19, 2006.

10.4	Amended and Restated Credit Agreement, dated October 27, 2006, among the Company, Wachovia Bank, National Association, as	Incorporated by reference from the Company’s Form 8-K filed October 30, 2006.

	Administrative Agent, and the other parties thereto.

10.5	Amendment No. 6, dated September 22, 2006, to the Amended and Restated Loan and Security Agreement, by and among the Company, Wachovia Bank, National	Incorporated by reference from the Company’s Form 8-K filed October 30, 2006.

(31.1)**	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

(31.2)**	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

(32.1)**	Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(32.2)**	Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

* - Management contract or compensatory plan or arrangement.

** - Filed herewith

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		THE PEP BOYS - MANNY, MOE & JACK
		(Registrant)

Date:	December 6, 2006		by:	/s/ Harry F. Yanowitz

			Harry F. Yanowitz
			Senior Vice President and Chief Financial Officer

INDEX TO EXHIBITS

(31.1)**		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

(31.2)**		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

(32.1)**		Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(32.2)**		Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

** - Filed herewith

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Pep Boys Manny Moe & Jack (PBY) Inactive 10-Q2007 Q3 Quarterly report

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